##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2005                                                 
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission file number 000-02479


DYNAMICS RESEARCH CORPORATION


(Exact Name of Registrant as Specified in Its Charter)


|                                                                                    |  |                                         
|----------------------------------------------------------------------------------- |  | ----------------------------------------
|Massachusetts                                                                       |  | 04-2211809                              
|(State or other Jurisdiction of
    incorporation or organization)                  |  | (I.R.S. Employer
    Identification No.)
|60 Frontage Road
    Andover, Massachusetts(Address of Principal Executive Offices) |  | 01810-5498(Zip Code)                    

Registrants telephone number, including area code




Securities registered pursuant to Section 12(b) of the
Act:




Securities registered pursuant to Section 12(g) of the
Act:




o þ


o þ


þ o


S-K 10-K 10-K. þ


12b-2 o þ o


12b-2 o þ




DOCUMENTS INCORPORATED BY REFERENCE













---



##### 










DYNAMICS RESEARCH CORPORATION


ANNUAL REPORT ON
FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2005


|                                                                          |      |                                                                                                                         |  |  |    | 
|------------------------------------------------------------------------- | ---- | ----------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|                                                                          |      | Page                                                                                                                    | 
|                                                                          |      |                                                                                                                         | 
|Part I                                                                    |      |                                                                                                                         |  | 
|                                                                          | Item |                                                                                                                         |  |  |   
|                                                                          |      | 1. Business                                                                                                             |  |  | 3  | 
|                                                                          |      | 1A. Risk Factors                                                                                                        |  |  | 14 | 
|                                                                          |      | 1B. Unresolved Staff Comments                                                                                           |  |  | 21 | 
|                                                                          |      | 2. Properties                                                                                                           |  |  | 21 | 
|                                                                          |      | 3. Legal Proceedings                                                                                                    |  |  | 21 | 
|                                                                          |      | 4. Submission of Matters to a Vote of
    Security Holders                                                              |  |  | 21 | 
|Part II                                                                   |      |                                                                                                                         |  | 
|                                                                          | Item |                                                                                                                         |  |  |   
|                                                                          |      | 5. Market for Registrants Common
    Equity, Related Stockholder Matters and Issuer Purchases of
    Equity Securities |  |  | 23 | 
|                                                                          |      | 6. Selected Financial Data                                                                                              |  |  | 24 | 
|                                                                          |      | 7. Managements Discussion and
    Analysis of Financial Condition and Results of Operations                            |  |  | 26 | 
|                                                                          |      | 7A. Quantitative and Qualitative
    Disclosures About Market Risk                                                      |  |  | 39 | 
|                                                                          |      | 8. Financial Statements and
    Supplementary Data                                                                      |  |  | 40 | 
|                                                                          |      | 9. Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure                             |  |  | 74 | 
|                                                                          |      | 9A. Controls and Procedures                                                                                             |  |  | 74 | 
|                                                                          |      | 9B. Other Information                                                                                                   |  |  | 75 | 
|Part III                                                                  |      |                                                                                                                         |  | 
|                                                                          | Item |                                                                                                                         |  |  |   
|                                                                          |      | 10. Directors and Executive Officers
    of the Registrant                                                              |  |  | 76 | 
|                                                                          |      | 11. Executive Compensation                                                                                              |  |  | 76 | 
|                                                                          |      | 12. Security Ownership of Certain
    Beneficial Owners and Management                                                  |  |  | 76 | 
|                                                                          |      | 13. Certain Relationships and Related
    Transactions                                                                  |  |  | 76 | 
|                                                                          |      | 14. Principal Accounting Fees and
    Services                                                                          |  |  | 76 | 
|Part IV                                                                   |      |                                                                                                                         |  | 
|                                                                          | Item |                                                                                                                         |  |  |   
|                                                                          |      | 15. Exhibits, Financial Statement
    Schedules                                                                         |  |  | 77 | 
|Ex-10.14 Forms of grant of restricted stock under the 2000 Incentive Plan
|Ex-21.1 Subsidiaries of the Registrant                                   
|Ex-23.1 Consent of Grant Thornton LLP                                    
|EX-31.1 Section 302 Certification of C.E.O.                              
|EX-31.2 Section 302 Certification of C.F.O.                              
|EX-32.1 Section 906 Certification of C.E.O.                              
|EX-32.2 Section 906 Certification of C.F.O.                              



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PART I







|        |         
|------- | --------
|Item 1. | BUSINESS

OVERVIEW














10-K, 10-K.


10-K


http://www.drc.com 10-K, 10-Q 8-K http://www.sec.gov


3



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MARKETS














MAJOR CUSTOMERS




National Defense and Intelligence Sector




4



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Aeronautical Systems Center, Air Force Materiel
Command


B-2 B-1B C-17 F-22A F-117A F-16








| |                                    
| | -----------------------------------
| | Air Force Electronic Systems Center





155-mile




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| |                   
| | ------------------
| | Air National Guard





| |                             
| | ----------------------------
| | Navy Trident Missile Program





| |                           
| | --------------------------
| | Air Force Depot Operations



B-1B, B-2, B-52, KC-135 E-3A




| |                               
| | ------------------------------
| | Army Aviation/ Missile Command





| |              
| | -------------
| | Army Training



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| |                          
| | -------------------------
| | United States Coast Guard





| |                               
| | ------------------------------
| | Air Force Air Mobility Command









| |                         
| | ------------------------
| | Office of Naval Research



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| |                       
| | ----------------------
| | Missile Defense Agency

42-month




| |                         
| | ------------------------
| | Navy Central HIV Program





| |                                                
| | -----------------------------------------------
| | Air Force Development and Fielding System Group





| |                               
| | ------------------------------
| | Naval Aviation Systems Command











| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Air Force Directorate of Installations, Logistics, and
    Mission Support (AF/IL)



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| |                             
| | ----------------------------
| | Naval Surface Warfare Center





| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Air Force Command and Control, Intelligence,
    Reconnaissance and Surveillance Center



Federal Civilian Agency Sector








| |                         
| | ------------------------
| | Internal Revenue Service







| |                                      
| | -------------------------------------
| | Federal Deposit Insurance Corporation

Configuration and Quality Management Staff


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| |                            
| | ---------------------------
| | National Science Foundation





| |                                             
| | --------------------------------------------
| | National Archives and Records Administration





| |                                                                       
| | ----------------------------------------------------------------------
| | United States Customs Service Air and Marine Interdiction
    Division



State and Local Government Sector






| |              
| | -------------
| | State of Ohio



state-of-


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| |                  
| | -----------------
| | State of Colorado









DRCs SOLUTIONS


Systems and Services






| |                      
| | ---------------------
| | Business Intelligence





| |                        
| | -----------------------
| | Business Transformation





| |                       
| | ----------------------
| | Acquisition Management



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| |                                 
| | --------------------------------
| | Training and Performance Support





| |                          
| | -------------------------
| | Automated Case Management





| |                           
| | --------------------------
| | IT Infrastructure Services



Precision Manufacturing


3-D 3-D


BUSINESS DEVELOPMENT






GOVERNMENT CONTRACTS










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BACKLOG




COMPETITION








RAW MATERIALS




GOVERNMENT REGULATION








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EMPLOYEES




PROPRIETARY INFORMATION









|         |             
|-------- | ------------
|Item 1A. | RISK FACTORS

10-K,


Our Revenue is Highly Concentrated on the Department of
Defense and Other Federal Agencies, and A Significant Portion of
Our Revenue is Derived From a Few Customers. Decreases in Their
Budgets, Changes in Program Priorities or Military Base Closures
Could Affect Our Results.








We Must Bear the Risk of Various Pricing Structures
Associated With Government Contracts.




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| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | adequately estimate the resources required to complete a project;                    
|
| |  | properly determine the scope of an engagement; or                                    
|
| |  | complete our contractual obligation in a manner consistent with
    the project plan.





Our Contracts and Subcontracts with Government Agencies
are Subject to a Competitive Bidding Process and to Termination
Without Cause by the Government.












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We Are Subject to a High Level of Government Regulations
and Audits Under Our Government Contracts and
Subcontracts.




Loss of Key Personnel Could Limit Our Growth.




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Our Failure to Obtain and Maintain Necessary Security
Clearances May Limit Our Ability to Perform Classified Work for
Government Clients, Which Could Harm Our Business.




Security Breaches in Sensitive Government Systems Could
Harm Our Business.




Our Employees May Engage in Misconduct or Other Improper
Activities, Which Could Harm Our Business.




We Are Involved in Various Litigation Matters Which, If
Not Resolved in Our Favor, Could Harm Our Business.






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If Our Internal Controls over Financial Reporting Do Not
Comply with Financial Reporting and Control Management
Requirements, There Could Be a Material Adverse Effect on Our
Operations or Financial Results. As a Result, Current and
Potential Stockholders Could Lose Confidence in Our Financial
Reporting, Which Would Harm Our Business and the Trading Price
of Our Stock.






We Operate in Highly Competitive Markets and May Have
Difficulties Entering New Markets.






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We May Be Subject to Product Liability Claims.




Economic Events May Affect Our Business Segments.




Our Products and Services Could Become Obsolete Due to
Rapid Technological Changes in the Industry.




Our Financing Requirements May Increase and We Could Have
Limited Access to Capital Markets.




Accounting System Upgrades and Conversions May Delay
Billing and Collections of our Accounts Receivable.




Our Quarterly Operating Results May Vary Significantly
From Quarter to Quarter.






| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | the number, size and timing of client projects commenced and
    completed during a quarter;

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| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | bid and proposal efforts undertaken;                                         
|
| |  | progress on fixed-price projects during a given quarter;                     
|
| |  | employee productivity and hiring, attrition and utilization
    rates;       
|
| |  | accuracy of estimates of resources required to complete ongoing
    projects;
|
| |  | the trend in interest rates, and                                             
|
| |  | general economic conditions.                                                 



We May Not Make or Complete Future Mergers, Acquisitions
or Strategic Alliances or Investments.






| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the difficulty of assimilating the acquired operations and
    personnel;                                                                           
|
| |  | the potential disruption of our ongoing business and diversion
    of resources and management time;                                                
|
| |  | the potential failure to retain key personnel of the acquired
    business;                                                                         
|
| |  | the difficulty of integrating systems, operations and
    cultures; and                                                                             
|
| |  | the potential impairment of relationships with customers as a
    result of changes in management or otherwise arising out of such
    transactions.



The Market Price of Our Common Stock May Be
Volatile.






| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | decreases in our earnings and revenue or quarterly operating
    results;
|
| |  | changes in estimates by analysts;                                        
|
| |  | market conditions in the industry;                                       
|
| |  | announcements and new developments by competitors; and                   
|
| |  | regulatory reviews.                                                      

20



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|         |                          
|-------- | -------------------------
|Item 1B. | UNRESOLVED STAFF COMMENTS








|        |           
|------- | ----------
|Item 2. | PROPERTIES








|        |                  
|------- | -----------------
|Item 3. | LEGAL PROCEEDINGS



10-K.




10-K.







|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



Executive Officers of the Registrant




21



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|                   |                                                                |     |    |  | 
|------------------ | -------------------------------------------------------------- | --- | -- |  | 
|Name and Position  |                                                                | Age |   
|                   |                                                                |     |   
|James P. Regan     |                                                                |     | 65 | 
|                   | President, Chairman and Chief Executive Officer                |     |    |  | 
|Richard A. Covel   |                                                                |     | 59 | 
|                   | Vice President, General Counsel and Secretary                  |     |    |  | 
|David Keleher      |                                                                |     | 56 | 
|                   | Senior Vice President and Chief Financial Officer              |     |    |  | 
|Steven P. Wentzell |                                                                |     | 59 | 
|                   | Senior Vice President and General Manager,
    Human Resources |     |    |  | 









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PART II







|        |                                                                                                                 
|------- | ----------------------------------------------------------------------------------------------------------------
|Item 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
    STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



|                                    |                |      |   |       |  |  |   |       | 
|----------------------------------- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|                                    |                | High |   | Low  
|                                    |                |      |   |      
|Fiscal year ended December 31, 2005 |                |      |   |       |  |  |   |      
|                                    | First quarter  |      | $ | 18.67 |  |  | $ | 14.33 | 
|                                    | Second quarter |      | $ | 18.20 |  |  | $ | 13.85 | 
|                                    | Third quarter  |      | $ | 16.49 |  |  | $ | 13.93 | 
|                                    | Fourth quarter |      | $ | 16.17 |  |  | $ | 14.41 | 
|                                   
|Fiscal year ended December 31, 2004 |                |      |   |       |  |  |   |      
|                                    | First quarter  |      | $ | 18.44 |  |  | $ | 14.69 | 
|                                    | Second quarter |      | $ | 18.90 |  |  | $ | 15.06 | 
|                                    | Third quarter  |      | $ | 17.97 |  |  | $ | 14.91 | 
|                                    | Fourth quarter |      | $ | 18.00 |  |  | $ | 15.22 | 

Number of Holders




Dividend Policy


10-K 10-K.


Securities Authorized for Issuance Under Equity Compensation
Plans




|                                                              |       |                      |         |                      |  |                             |      |      |  |  |         |         | 
|------------------------------------------------------------- | ----- | -------------------- | ------- | -------------------- |  | --------------------------- | ---- | ---- |  |  | ------- | ------- | 
|                                                              |       |                      |         |                      |  | Number of securities       
|                                                              |       | Number of securities |         |                      |  | remaining available        
|                                                              |       | to be issued         |         | Weighted-average     |  | for future issuance        
|                                                              |       | upon exercise of     |         | exercise price of    |  | under equity compensation  
|                                                              |       | outstanding options, |         | outstanding options, |  | plans (excluding securities
|                                                              |       | warrants and rights  |         | warrants and rights  |  | reflected in column (a))   
|                                                              |       | (a)                  |         | (b)                  |  | (c)                        
|                                                              |       |                      |         |                      |  |                            
|Plan category                                                 |       |                      |         |                      |  |                             |      |      |  |  |         |        
|Equity compensation plans approved by security holders(1)     |       |                      | 989,393 |                      |  | $                           | 9.53 |      |  |  | 517,957 |        
|Equity compensation plans not approved by security holders(2) |       |                      | 250,000 |                      |  | $                           | 4.44 |      |  |  |        |        
|                                                              |       |                      |         |                      |  |                             |      |      |  |  |         |        
|                                                              | Total |                      |         | 1,239,393            |  |                             | $    | 8.51 |  |  |         | 517,957 | 
|                                                              |       |                      |         |                      |  |                             |      |      |  |  |         |        

23



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the number of shares subject to options issued under
    the following plans: 1993 Equity Incentive Plan, 1995 Stock
    Option Plan for Non-Employee Directors, 2000 Incentive Plan,
    2000 Employee Stock Purchase Plan and 2003 Incentive Plan.                                                                                                                                                                            
|   
|(2) | In 1999, the company granted Mr. Regan 250,000
    non-qualified stock options to purchase shares of the
    companys common stock. The option price is $4.44, which
    was the fair market value of the common stock at the date of
    grant. Twenty percent of the options vested immediately. An
    additional 20% vested in each successive year from the date of
    grant. The options expire ten years from the date of grant.






|        |                        
|------- | -----------------------
|Item 6. | SELECTED FINANCIAL DATA

10-K, 10-K.


|                                                                      |                                                    |                                         |         |        |         |   |         |       |      |   |            |       |      |         |         |       |      |   |         |       |      | 
|--------------------------------------------------------------------- | -------------------------------------------------- | --------------------------------------- | ------- | ------ | ------- | - | ------- | ----- | ---- | - | ---------- | ----- | ---- | ------- | ------- | ----- | ---- | - | ------- | ----- | ---- | 
|                                                                      |                                                    | Year ended December 31,                 |        
|                                                                      |                                                    |                                         |        
|                                                                      |                                                    | 2005                                    |         |        | 2004(1) |   |         | 2003  |      |   | 2002(2)(3) |       |      | 2001(3) |        
|(in thousands, except share and per share data)                       |                                                    |                                         |         |        |         |   |         |       |      |   |            |       |      |         |        
|Revenue                                                               |                                                    | $                                       | 300,440 |        |         | $ | 275,706 |       |      | $ | 244,808    |       |      | $       | 192,610 |       |      | $ | 190,264 |      
|Operating income                                                      |                                                    | $                                       | 21,305  |        |         | $ | 17,507  |       |      | $ | 15,389     |       |      | $       | 12,647  |       |      | $ | 13,010  |      
|Income from continuing operations                                     |                                                    | $                                       | 11,433  |        |         | $ | 9,373   |       |      | $ | 8,655      |       |      | $       | 7,357   |       |      | $ | 7,102   |      
|Loss from discontinued operations                                     |                                                    |                                         |        |        |         |   |        |       |      |   | (1,635     | )     |      |         | (1,124  | )     |      |   | (619    | )    
|Gain (loss) on disposal of discontinued operations                    |                                                    |                                         |        |        |         |   |        |       |      |   | (348       | )     |      |         |        |       |      |   | 62      |      
|                                                                      |                                                    |                                         |         |        |         |   |         |       |      |   |            |       |      |         |        
|                                                                      | Net income                                         |                                         | $       | 11,433 |         |   | $       | 9,373 |      |   | $          | 6,672 |      |         | $       | 6,233 |      |   | $       | 6,545 |     
|                                                                      |                                                    |                                         |         |        |         |   |         |       |      |   |            |       |      |         |        
|Earnings per common share  basic                                     |                                                    |                                         |         |        |         |   |         |       |      |   |            |       |      |         |         |       |      |   |         |      
|                                                                      | Income from continuing operations                  |                                         | $       | 1.30   |         |   | $       | 1.10  |      |   | $          | 1.05  |      |         | $       | 0.92  |      |   | $       | 0.92  |     
|                                                                      | Loss from discontinued operations                  |                                         |         |       |         |   |         |      |      |   |            | (0.20 | )    |         |         | (0.14 | )    |   |         | (0.08 | )   
|                                                                      | Gain (loss) on disposal of discontinued operations |                                         |         |       |         |   |         |      |      |   |            | (0.04 | )    |         |         |      |      |   |         | 0.01  |     
|                                                                      |                                                    |                                         |         |        |         |   |         |       |      |   |            |       |      |         |        
|                                                                      |                                                    | Net earnings per common share  basic   |         | $      | 1.30    |   |         | $     | 1.10 |   |            | $     | 0.81 |         |         | $     | 0.78 |   |         | $     | 0.85 | 
|                                                                      |                                                    |                                         |         |        |         |   |         |       |      |   |            |       |      |         |        
|Earnings per common share  diluted                                   |                                                    |                                         |         |        |         |   |         |       |      |   |            |       |      |         |         |       |      |   |         |      
|                                                                      | Income from continuing operations                  |                                         | $       | 1.24   |         |   | $       | 1.03  |      |   | $          | 0.98  |      |         | $       | 0.83  |      |   | $       | 0.88  |     
|                                                                      | Loss from discontinued operations                  |                                         |         |       |         |   |         |      |      |   |            | (0.18 | )    |         |         | (0.13 | )    |   |         | (0.08 | )   
|                                                                      | Gain (loss) on disposal of discontinued operations |                                         |         |       |         |   |         |      |      |   |            | (0.04 | )    |         |         |      |      |   |         | 0.01  |     
|                                                                      |                                                    |                                         |         |        |         |   |         |       |      |   |            |       |      |         |        
|                                                                      |                                                    | Net earnings per common share  diluted |         | $      | 1.24    |   |         | $     | 1.03 |   |            | $     | 0.76 |         |         | $     | 0.70 |   |         | $     | 0.81 | 
|                                                                      |                                                    |                                         |         |        |         |   |         |       |      |   |            |       |      |         |        
|Net cash provided by operating activities  continuing
    operations |                                                    | $                                       | 25,032  |        |         | $ | 3,961   |       |      | $ | 13,186     |       |      | $       | 9,915   |       |      | $ | 23,554  |      
|Research and development expense                                      |                                                    | $                                       |        |        |         | $ |        |       |      | $ |           |       |      | $       | 175     |       |      | $ | 367     |      
|Capital expenditures                                                  |                                                    | $                                       | 4,571   |        |         | $ | 4,544   |       |      | $ | 8,163      |       |      | $       | 3,347   |       |      | $ | 3,595   |      
|Depreciation                                                          |                                                    | $                                       | 3,719   |        |         | $ | 3,624   |       |      | $ | 3,007      |       |      | $       | 3,192   |       |      | $ | 2,989   |      

24



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|                                                                                     |  |                    |           |   |         |   |           |      |  |   |            |   |  |         |           |   |  |   |           |  
|------------------------------------------------------------------------------------ |  | ------------------ | --------- | - | ------- | - | --------- | ---- |  | - | ---------- | - |  | ------- | --------- | - |  | - | --------- | -
|                                                                                     |  | As of December 31, |          
|                                                                                     |  |                    |          
|                                                                                     |  | 2005               |           |   | 2004(1) |   |           | 2003 |  |   | 2002(2)(3) |   |  | 2001(3) |          
|                                                                                     |  |                    |           |   |         |   |           |      |  |   |            |   |  |         |          
|Total assets                                                                         |  | $                  | 187,753   |   |         | $ | 205,134   |      |  | $ | 121,070    |   |  | $       | 111,676   |   |  | $ | 80,821    |  
|Current portion of long-term debt, notes payable and revolving
    credit facilities |  | $                  | 10,170    |   |         | $ | 18,357    |      |  | $ | 9,000      |   |  | $       | 15,144    |   |  | $ | 500       |  
|Long-term debt (less current portion)                                                |  | $                  | 15,242    |   |         | $ | 51,485    |      |  | $ | 7,750      |   |  | $       | 8,250     |   |  | $ | 8,750     |  
|Stockholders equity                                                                 |  | $                  | 74,187    |   |         | $ | 61,318    |      |  | $ | 48,651     |   |  | $       | 39,809    |   |  | $ | 37,138    |  
|Return on invested capital                                                           |  |                    | 10.2      | % |         |   | 10.7      | %    |  |   | 14.0       | % |  |         | 14.4      | % |  |   | 17.7      | %
|Stockholders equity per share                                                       |  | $                  | 8.16      |   |         | $ | 7.02      |      |  | $ | 5.76       |   |  | $       | 4.88      |   |  | $ | 4.68      |  
|Return on stockholders equity                                                       |  |                    | 16.9      | % |         |   | 17.0      | %    |  |   | 20.3       | % |  |         | 18.6      | % |  |   | 23.5      | %
|Backlog                                                                              |  | $                  | 144,571   |   |         | $ | 165,017   |      |  | $ | 123,895    |   |  | $       | 111,070   |   |  | $ | 90,382    |  
|Number of shares outstanding                                                         |  |                    | 9,096,893 |   |         |   | 8,737,562 |      |  |   | 8,443,082  |   |  |         | 8,164,180 |   |  |   | 7,940,610 |  






|    |                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts include results of operations of Impact Innovations
    Group LLC (acquired September 1, 2004) for the period
    subsequent to its acquisition.                                                                
|   
|(2) | Amounts include results of operations of Andrulis Corporation
    (acquired December 20, 2002) and HJ Ford Associates, Inc.
    (acquired May 31, 2002) for the periods subsequent to their
    respective acquisitions.
|   
|(3) | Amounts were restated to report the results of the
    companys Encoder Division as discontinued operations as a
    result of the decision to exit the business in 2002.                                              

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS


10-K 10-K.


OVERVIEW
















26



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CRITICAL ACCOUNTING POLICIES








Revenue Recognition






27



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Accounting for Performance of Construction-Type and Certain
Production-Type Contracts




Out-of






Goodwill and Other Intangible Assets




Income Taxes and Deferred Taxes




28



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Pensions










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RESULTS OF OPERATIONS




|                                                                        |                       |                         |         |          |  |             |      |          |   |             |         |          |  |  |      |       |   |   |         |         |  |  |      |       |  
|----------------------------------------------------------------------- | --------------------- | ----------------------- | ------- | -------- |  | ----------- | ---- | -------- | - | ----------- | ------- | -------- |  |  | ---- | ----- | - | - | ------- | ------- |  |  | ---- | ----- | -
|                                                                        |                       | Year Ended December 31,
|                                                                        |                       |                        
|                                                                        |                       | 2005                    |         | 2004     |  | 2003       
|                                                                        |                       |                         |         |          |  |            
|                                                                        |                       |                         |         | % of     |  |             |      | % of     |   |             |         | % of    
|                                                                        |                       | $ thousands             |         | revenues |  | $ thousands |      | revenues |   | $ thousands |         | revenues
|                                                                        |                       |                         |         |          |  |             |      |          |   |             |         |         
|Contract revenue                                                        |                       | $                       | 293,662 |          |  |             | 97.7 | %        |   | $           | 268,634 |          |  |  | 97.4 | %     |   | $ | 237,876 |         |  |  | 97.2 | %    
|Product sales                                                           |                       |                         | 6,778   |          |  |             | 2.3  | %        |   |             | 7,072   |          |  |  | 2.6  | %     |   |   | 6,932   |         |  |  | 2.8  | %    
|                                                                        |                       |                         |         |          |  |             |      |          |   |             |         |          |  |  |      |       |   |   |         |         |  |  |      |      
|                                                                        | Total revenue         |                         |         | 300,440  |  |             |      | 100.0    | % |             |         | 275,706  |  |  |      | 100.0 | % |   |         | 244,808 |  |  |      | 100.0 | %
|Gross margin on contract revenue(1)                                     |                       |                         | 48,096  |          |  |             | 16.4 | %        |   |             | 41,125  |          |  |  | 15.3 | %     |   |   | 38,229  |         |  |  | 16.1 | %    
|Gross margin on product sales(1)                                        |                       |                         | 1,566   |          |  |             | 23.1 | %        |   |             | 1,858   |          |  |  | 26.3 | %     |   |   | 1,832   |         |  |  | 26.4 | %    
|                                                                        |                       |                         |         |          |  |             |      |          |   |             |         |          |  |  |      |       |   |   |         |         |  |  |      |      
|                                                                        | Total gross margin(1) |                         |         | 49,662   |  |             |      | 16.5     | % |             |         | 42,983   |  |  |      | 15.6  | % |   |         | 40,061  |  |  |      | 16.4  | %
|                                                                       
|Selling, general and administrative expenses                            |                       |                         | 25,318  |          |  |             | 8.4  | %        |   |             | 23,152  |          |  |  | 8.4  | %     |   |   | 22,948  |         |  |  | 9.4  | %    
|Amortization of intangible assets                                       |                       |                         | 3,039   |          |  |             | 1.0  | %        |   |             | 2,324   |          |  |  | 0.8  | %     |   |   | 1,724   |         |  |  | 0.7  | %    
|                                                                       
|Operating income                                                        |                       |                         | 21,305  |          |  |             | 7.1  | %        |   |             | 17,507  |          |  |  | 6.4  | %     |   |   | 15,389  |         |  |  | 6.3  | %    
|Interest expense, net                                                   |                       |                         | (4,367  | )        |  |             | (1.5 | )%       |   |             | (2,225  | )        |  |  | (0.8 | )%    |   |   | (854    | )       |  |  | (0.3 | )%   
|Other income, net                                                       |                       |                         | 2,276   |          |  |             | 0.8  | %        |   |             | 360     |          |  |  | 0.1  | %     |   |   | 454     |         |  |  | 0.1  | %    
|                                                                       
|Income from continuing operations before provision for income
    taxes |                       |                         | 19,214  |          |  |             | 6.4  | %        |   |             | 15,642  |          |  |  | 5.7  | %     |   |   | 14,989  |         |  |  | 6.1  | %    






|    |                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------
|(1) | These amounts represent a percentage of contract revenues,
    product sales and total revenues, respectively.

Revenue




Contract revenues




|                                           |  |                         |       |      |  |      |       |  |  |   |       | 
|------------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                           |  | Year Ended December 31,
|                                           |  |                        
|                                           |  | 2005                    |       | 2004 |  | 2003
|                                           |  |                         |       |      |  |     
|National defense and intelligence agencies |  | $                       | 233.9 |      |  | $    | 215.4 |  |  | $ | 191.7 | 
|Federal civilian agencies                  |  |                         | 33.8  |      |  |      | 31.3  |  |  |   | 35.2  | 
|State and local government agencies        |  |                         | 23.0  |      |  |      | 20.3  |  |  |   | 11.0  | 
|Other                                      |  |                         | 3.0   |      |  |      | 1.6   |  |  |   |      | 
|                                           |  |                         |       |      |  |      |       |  |  |   |       | 
|                                           |  | $                       | 293.7 |      |  | $    | 268.6 |  |  | $ | 237.9 | 
|                                           |  |                         |       |      |  |      |       |  |  |   |       | 

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|                                              |  |                         |     |   |      |  |     |      |  |  |     |  
|--------------------------------------------- |  | ----------------------- | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                                              |  | Year ended December 31, |    
|                                              |  |                         |    
|                                              |  | 2005                    |     |   | 2004 |  |     | 2003 | 
|                                              |  |                         |     |   |      |  |     |      | 
|Time and materials                            |  |                         | 56  | % |      |  | 59  | %    |  |  | 64  | %
|Cost reimbursable                             |  |                         | 20  | % |      |  | 21  | %    |  |  | 23  | %
|Fixed price, including service-type contracts |  |                         | 24  | % |      |  | 20  | %    |  |  | 13  | %
|                                              |  |                         |     |   |      |  |     |      | 
|                                              |  |                         | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                                              |  |                         |     |   |      |  |     |      | 
|Prime contract                                |  |                         | 68  | % |      |  | 74  | %    |  |  | 69  | %
|Sub-contract                                  |  |                         | 32  | % |      |  | 26  | %    |  |  | 31  | %
|                                              |  |                         |     |   |      |  |     |      | 
|                                              |  |                         | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                                              |  |                         |     |   |      |  |     |      | 

Product sales




Funded backlog






31



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Gross profit and margin




Sub-contractor






Selling, general and administrative expenses




Amortization of intangible assets




Operating income






32



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Interest income and expense




Other income and expense




Income taxes




Discontinued operations








Net income




Shares used in computing earnings (loss) per share




33



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LIQUIDITY AND CAPITAL RESOURCES




Operating Activities




Share-Based Payment








34



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Investing Activities








placed-in






Financing Activities






35



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| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Any failure by the company and its subsidiaries to make any
    payment of principal, interest and other sums due under the
    facility within three calendar days of the date when such
    payment is due;
|
| |  | Any breach by the company or any of its subsidiaries of certain
    covenants, representations and warranties;                                                                                               
|
| |  | Any default and acceleration of any indebtedness owed by the
    company or any of its subsidiaries to any person (other than the
    bank group) which is in excess of $1,000,000;                          
|
| |  | Any final judgment against the company or any of its
    subsidiaries in excess of $1,000,000 which has not been insured
    to the reasonable satisfaction of the Administrative Agent;                     
|
| |  | Any bankruptcy (voluntary or involuntary) of the company or any
    of its subsidiaries; and                                                                                                                 
|
| |  | Any material adverse change in the business or financial
    condition of the company and its subsidiaries; or                                                                                               
|
| |  | Any change in control of the company.                                                                                                                                                                        

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Off-Balance Sheet Arrangements




Commitments




|                 |                               |                        |        |           |  |             |        |            |  |            |        |        |  |   |        |        |  |   |        |        | 
|---------------- | ----------------------------- | ---------------------- | ------ | --------- |  | ----------- | ------ | ---------- |  | ---------- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                 |                               | Payments due by period
|                 |                               |                       
|                 |                               |                        |        | Less than |  | Two to      |        | Four to    |  |           
|                 |                               | Total                  |        | one year  |  | three years |        | five years |  | Thereafter
|                 |                               |                        |        |           |  |             |        |            |  |           
|Long-term debt   |                               | $                      | 25,412 |           |  | $           | 10,170 |            |  | $          | 15,242 |        |  | $ |       |        |  | $ |       |       
|Operating leases |                               |                        | 42,946 |           |  |             | 7,011  |            |  |            | 12,717 |        |  |   | 10,737 |        |  |   | 12,481 |       
|Letter of Credit |                               |                        | 1,031  |           |  |             |       |            |  |            | 1,031  |        |  |   |       |        |  |   |       |       
|                 |                               |                        |        |           |  |             |        |            |  |            |        |        |  |   |        |        |  |   |        |       
|                 | Total contractual obligations |                        | $      | 69,389    |  |             | $      | 17,181     |  |            | $      | 28,990 |  |   | $      | 10,737 |  |   | $      | 12,481 | 
|                 |                               |                        |        |           |  |             |        |            |  |            |        |        |  |   |        |        |  |   |        |       

long-term




Contingencies








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10-K.




NEW ACCOUNTING PRONOUNCEMENTS


Accounting Changes and Error Corrections: a Replacement of
Accounting Principles Board (APB) Opinion No. 20 and
FASB Statement No. 3 Share-Based Payment


Share-Based Payment Accounting for Stock Issued to Employees


IMPACT OF INFLATION AND CHANGING PRICES




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|         |                                                           
|-------- | ----------------------------------------------------------
|Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK







39



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PART II







|        |                                            
|------- | -------------------------------------------
|Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

|                                                                                                                                                  |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                                  |  | Page |   
|                                                                                                                                                  |  |      |   
|Report of Independent Registered Public
    Accounting Firm                                                                                       |  |      | 41 | 
|Consolidated Balance Sheets as of
    December 31, 2005 and 2004                                                                                  |  |      | 42 | 
|Consolidated Statements of Operations for
    the years ended December 31, 2005, 2004, and 2003                                                   |  |      | 43 | 
|Consolidated Statements of Changes in
    Stockholders Equity and Comprehensive Income for the years
    ended December 31, 2005, 2004, and 2003 |  |      | 44 | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2005, 2004 and 2003                                                    |  |      | 45 | 
|Notes to Consolidated Financial
    Statements                                                                                                    |  |      | 46 | 
|Schedule II  Valuation and
    Qualifying Accounts and Reserves                                                                                  |  |      | 73 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














Internal Control-Integrated Framework








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DYNAMICS RESEARCH CORPORATION





CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)


|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |        |     |         | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | --- | ------- | - | ------ | --- | ------- | 
|                                     |                                                                                                       | December 31,                                                                              
|                                     |                                                                                                       |                                                                                           
|                                     |                                                                                                       | 2005                                                                                       |                                            | 2004   
|                                     |                                                                                                       |                                                                                            |                                            |        
|ASSETS                              
|Current assets                       |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                     | Cash and cash equivalents                                                                             |                                                                                            | $                                          | 1,020   |     |         | $ | 925    |    
|                                     | Accounts receivable, net of allowances of $588 at
    December 31, 2005 and $644 at December 31, 2004 |                                                                                            |                                            | 32,894  |     |         |   | 45,978 |    
|                                     | Unbilled expenditures and fees on contracts in process                                                |                                                                                            |                                            | 60,210  |     |         |   | 48,119 |    
|                                     | Prepaid expenses and other current assets                                                             |                                                                                            |                                            | 1,483   |     |         |   | 5,668  |    
|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                     |                                                                                                       |                                                                                            | Total current assets                       |         |     | 95,607  |   |        |     | 100,690 | 
|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|Noncurrent assets                    |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                     | Property, plant and equipment, net                                                                    |                                                                                            |                                            | 12,252  |     |         |   | 22,139 |    
|                                     | Goodwill                                                                                              |                                                                                            |                                            | 63,055  |     |         |   | 63,055 |    
|                                     | Intangible assets, net                                                                                |                                                                                            |                                            | 8,480   |     |         |   | 11,519 |    
|                                     | Deferred tax asset                                                                                    |                                                                                            |                                            | 3,916   |     |         |   |       |    
|                                     | Unbilled expenditures and fees on contracts in process                                                |                                                                                            |                                            | 1,549   |     |         |   | 2,203  |    
|                                     | Other noncurrent assets                                                                               |                                                                                            |                                            | 2,894   |     |         |   | 5,528  |    
|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                     |                                                                                                       |                                                                                            | Total noncurrent assets                    |         |     | 92,146  |   |        |     | 104,444 | 
|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                     |                                                                                                       |                                                                                            | Total assets                               |         | $   | 187,753 |   |        | $   | 205,134 | 
|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|Current liabilities                  |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                     | Current portion of long-term debt                                                                     |                                                                                            | $                                          | 10,170  |     |         | $ | 8,357  |    
|                                     | Revolver                                                                                              |                                                                                            |                                            |        |     |         |   | 10,000 |    
|                                     | Accounts payable                                                                                      |                                                                                            |                                            | 25,668  |     |         |   | 20,550 |    
|                                     | Deferred taxes                                                                                        |                                                                                            |                                            | 19,825  |     |         |   | 15,418 |    
|                                     | Accrued compensation and employee benefits                                                            |                                                                                            |                                            | 8,238   |     |         |   | 8,952  |    
|                                     | Accrued pension liability                                                                             |                                                                                            |                                            | 5,818   |     |         |   | 4,376  |    
|                                     | Accrued vacation                                                                                      |                                                                                            |                                            | 4,705   |     |         |   | 4,586  |    
|                                     | Other accrued expenses                                                                                |                                                                                            |                                            | 6,392   |     |         |   | 4,869  |    
|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                     |                                                                                                       |                                                                                            | Total current liabilities                  |         |     | 80,816  |   |        |     | 77,108  | 
|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|Long-term liabilities                |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                     | Long-term debt, less current portion                                                                  |                                                                                            |                                            | 15,242  |     |         |   | 51,485 |    
|                                     | Deferred taxes                                                                                        |                                                                                            |                                            |        |     |         |   | 591    |    
|                                     | Accrued pension liability                                                                             |                                                                                            |                                            | 5,328   |     |         |   | 11,336 |    
|                                     | Deferred gain on sale of building                                                                     |                                                                                            |                                            | 6,158   |     |         |   |       |    
|                                     | Other long-term liabilities                                                                           |                                                                                            |                                            | 6,022   |     |         |   | 3,296  |    
|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                     |                                                                                                       |                                                                                            | Total long-term liabilities                |         |     | 32,750  |   |        |     | 66,708  | 
|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                     |                                                                                                       |                                                                                            | Total liabilities                          |         |     | 113,566 |   |        |     | 143,816 | 
|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|Commitments and contingencies        |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|Stockholders equity                 |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                     | Preferred stock, $0.10 par value, 5,000,000 shares
    authorized, no shares issued                   |                                                                                            |                                            |        |     |         |   |       |    
|                                     | Common stock, $0.10 par value, 30,000,000 shares
    authorized:                                      |                                                                                            |                                            |         |     |         |   |        |    
|                                     |                                                                                                       | Issued 9,096,893 shares at December 31, 2005 and
    8,737,562 shares at December 31, 2004 |                                            |         | 910 |         |   |        | 874 |        
|                                     | Capital in excess of par value                                                                        |                                                                                            |                                            | 45,571  |     |         |   | 40,849 |    
|                                     | Unearned compensation                                                                                 |                                                                                            |                                            | (1,850  | )   |         |   | (1,572 | )  
|                                     | Accumulated other comprehensive loss                                                                  |                                                                                            |                                            | (10,768 | )   |         |   | (7,724 | )  
|                                     | Retained earnings                                                                                     |                                                                                            |                                            | 40,324  |     |         |   | 28,891 |    
|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                     |                                                                                                       |                                                                                            | Total stockholders equity                 |         |     | 74,187  |   |        |     | 61,318  | 
|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |       
|                                     |                                                                                                       |                                                                                            | Total liabilities and stockholders equity |         | $   | 187,753 |   |        | $   | 205,134 | 
|                                     |                                                                                                       |                                                                                            |                                            |         |     |         |   |       



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DYNAMICS RESEARCH CORPORATION





CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except share and per share data)


|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |   |           |         | 
|--------------------------------------------------------------------------- | ----------------------------------- | ------------------------------------------------------ | ---------------------------------- | ---- | --------- | ------- | ------- | - | --------- | ------- | ------- | - | --------- | ------- | 
|                                                                            |                                     | Year Ended December 31,                               
|                                                                            |                                     |                                                       
|                                                                            |                                     | 2005                                                   |                                    | 2004 |           | 2003   
|                                                                            |                                     |                                                        |                                    |      |           |        
|Contract revenue                                                            |                                     | $                                                      | 293,662                            |      |           | $       | 268,634 |   |           | $       | 237,876 |  
|Product sales                                                               |                                     |                                                        | 6,778                              |      |           |         | 7,072   |   |           |         | 6,932   |  
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|                                                                            |                                     |                                                        | Total revenue                      |      |           | 300,440 |         |   |           | 275,706 |         |   |           | 244,808 | 
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|Cost of contract revenue                                                    |                                     |                                                        | 245,566                            |      |           |         | 227,509 |   |           |         | 199,647 |  
|Cost of product sales                                                       |                                     |                                                        | 5,212                              |      |           |         | 5,214   |   |           |         | 5,100   |  
|Selling, general and administrative expenses                                |                                     |                                                        | 25,318                             |      |           |         | 23,152  |   |           |         | 22,948  |  
|Amortization of intangible assets                                           |                                     |                                                        | 3,039                              |      |           |         | 2,324   |   |           |         | 1,724   |  
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|                                                                            |                                     |                                                        | Total operating costs and expenses |      |           | 279,135 |         |   |           | 258,199 |         |   |           | 229,419 | 
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|Operating income                                                            |                                     |                                                        | 21,305                             |      |           |         | 17,507  |   |           |         | 15,389  |  
|Interest expense, net                                                       |                                     |                                                        | (4,367                             | )    |           |         | (2,225  | ) |           |         | (854    | )
|Other income                                                                |                                     |                                                        | 2,276                              |      |           |         | 360     |   |           |         | 454     |  
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|Income from continuing operations before provision for income
    taxes     |                                     |                                                        | 19,214                             |      |           |         | 15,642  |   |           |         | 14,989  |  
|Provision for income taxes                                                  |                                     |                                                        | 7,781                              |      |           |         | 6,269   |   |           |         | 6,334   |  
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|Income from continuing operations                                           |                                     |                                                        | 11,433                             |      |           |         | 9,373   |   |           |         | 8,655   |  
|Loss from discontinued operations, net of tax benefit of $1,058             |                                     |                                                        |                                   |      |           |         |        |   |           |         | (1,635  | )
|Loss on disposal of discontinued operations, net of tax benefit
    of $226 |                                     |                                                        |                                   |      |           |         |        |   |           |         | (348    | )
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|Net income                                                                  |                                     | $                                                      | 11,433                             |      |           | $       | 9,373   |   |           | $       | 6,672   |  
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|Earnings per common share                                                   |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|                                                                            | Basic                               |                                                        |                                    |      |           |         |         |   |           |         |         |   |          
|                                                                            |                                     | Income from continuing operations                      |                                    | $    | 1.30      |         |         | $ | 1.10      |         |         | $ | 1.05      |        
|                                                                            |                                     | Loss from discontinued operations                      |                                    |      |          |         |         |   |          |         |         |   | (0.20     | )      
|                                                                            |                                     | Loss on disposal of discontinued operations            |                                    |      |          |         |         |   |          |         |         |   | (0.04     | )      
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|                                                                            |                                     |                                                        | Net earnings per common share      |      | $         | 1.30    |         |   | $         | 1.10    |         |   | $         | 0.81    | 
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|                                                                            | Diluted                             |                                                        |                                    |      |           |         |         |   |           |         |         |   |          
|                                                                            |                                     | Income from continuing operations                      |                                    | $    | 1.24      |         |         | $ | 1.03      |         |         | $ | 0.98      |        
|                                                                            |                                     | Loss from discontinued operations                      |                                    |      |          |         |         |   |          |         |         |   | (0.18     | )      
|                                                                            |                                     | Loss on disposal of discontinued operations            |                                    |      |          |         |         |   |          |         |         |   | (0.04     | )      
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|                                                                            |                                     |                                                        | Net earnings per common share      |      | $         | 1.24    |         |   | $         | 1.03    |         |   | $         | 0.76    | 
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|                                                                            | Weighted average shares outstanding |                                                        |                                    |      |           |         |         |   |           |         |         |   |          
|                                                                            |                                     | Weighted average shares outstanding  basic            |                                    |      | 8,809,644 |         |         |   | 8,499,013 |         |         |   | 8,226,225 |        
|                                                                            |                                     | Dilutive effect of options and restricted stock grants |                                    |      | 443,878   |         |         |   | 574,035   |         |         |   | 615,818   |        
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  
|                                                                            |                                     | Weighted average shares outstanding  diluted          |                                    |      | 9,253,522 |         |         |   | 9,073,048 |         |         |   | 8,842,043 |        
|                                                                            |                                     |                                                        |                                    |      |           |         |         |   |           |         |         |  



43



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##### Table of Contents





DYNAMICS RESEARCH CORPORATION





CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME


(in thousands)


|                                                                                                                            |  |                 |   |           |  |                |   |           |  |          |        |               |  |          |      |              |  |      |        |          |  |       |      |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        |  |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------- |  | --------------- | - | --------- |  | -------------- | - | --------- |  | -------- | ------ | ------------- |  | -------- | ---- | ------------ |  | ---- | ------ | -------- |  | ----- | ---- | - |  | - | ------ | - |  | - | ------ | - |  | - | ------- | - |  | - | ------ |  |  | - | ------ | -
|                                                                                                                            |  |                 |   |           |  | Common Stock   |   |           |  |          |        |               |  |          |      |             
|                                                                                                                            |  |                 |   |           |  |                |   |           |  |          |        |               |  |          |      |             
|                                                                                                                            |  |                 |   |           |  |                |   | Capital   |  |          |        | Accumulated   |  |          |      |             
|                                                                                                                            |  | Preferred Stock |   | Issued    |  | Treasury Stock |   | in Excess |  |          |        | Other         |  |          |      |             
|                                                                                                                            |  |                 |   |           |  |                |   | of Par    |  | Unearned |        | Comprehensive |  | Retained |      |             
|                                                                                                                            |  | Shares          |   | Par value |  | Shares         |   | Par value |  | Shares   |        | Par value     |  | Value    |      | Compensation |  | Loss |        | Earnings |  | Total
|                                                                                                                            |  |                 |   |           |  |                |   |           |  |          |        |               |  |          |      |              |  |      |        |          |  |      
|Balance at December 31, 2002                                                                                                |  |                 |  |           |  | $              |  |           |  |          | 9,544  |               |  | $        | 954  |              |  |      | (1,379 | )        |  | $     | (138 | ) |  | $ | 33,844 |   |  | $ | (816   | ) |  | $ | (6,881  | ) |  | $ | 12,846 |  |  | $ | 39,809 |  
|Issuance of common stock through stock options exercised and
    employee stock purchase plan                               |  |                 |  |           |  |                |  |           |  |          | 255    |               |  |          | 26   |              |  |      |       |          |  |       |     |   |  |   | 2,373  |   |  |   |       |   |  |   |        |   |  |   |       |  |  |   | 2,399  |  
|Issuance of restricted stock                                                                                                |  |                 |  |           |  |                |  |           |  |          | 23     |               |  |          | 2    |              |  |      |       |          |  |       |     |   |  |   | 228    |   |  |   | (230   | ) |  |   |        |   |  |   |       |  |  |   |       |  
|Amortization of unearned compensation                                                                                       |  |                 |  |           |  |                |  |           |  |          |       |               |  |          |     |              |  |      |       |          |  |       |     |   |  |   |       |   |  |   | 249    |   |  |   |        |   |  |   |       |  |  |   | 249    |  
|Accumulated other comprehensive loss(1)                                                                                     |  |                 |  |           |  |                |  |           |  |          |       |               |  |          |     |              |  |      |       |          |  |       |     |   |  |   |       |   |  |   |       |   |  |   | (675    | ) |  |   |       |  |  |   | (675   | )
|Tax benefit from stock options exercised                                                                                    |  |                 |  |           |  |                |  |           |  |          |       |               |  |          |     |              |  |      |       |          |  |       |     |   |  |   | 197    |   |  |   |       |   |  |   |        |   |  |   |       |  |  |   | 197    |  
|Net income                                                                                                                  |  |                 |  |           |  |                |  |           |  |          |       |               |  |          |     |              |  |      |       |          |  |       |     |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   | 6,672  |  |  |   | 6,672  |  
|                                                                                                                            |  |                 |   |           |  |                |   |           |  |          |        |               |  |          |      |              |  |      |        |          |  |       |      |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        |  |  |   |        |  
|Balance at December 31, 2003                                                                                                |  |                 |  |           |  |                |  |           |  |          | 9,822  |               |  |          | 982  |              |  |      | (1,379 | )        |  |       | (138 | ) |  |   | 36,642 |   |  |   | (797   | ) |  |   | (7,556  | ) |  |   | 19,518 |  |  |   | 48,651 |  
|Issuance of common stock through stock options exercised and
    employee stock purchase plan                               |  |                 |  |           |  |                |  |           |  |          | 235    |               |  |          | 23   |              |  |      |       |          |  |       |     |   |  |   | 2,584  |   |  |   |       |   |  |   |        |   |  |   |       |  |  |   | 2,607  |  
|Issuance of restricted stock                                                                                                |  |                 |  |           |  |                |  |           |  |          | 96     |               |  |          | 10   |              |  |      |       |          |  |       |     |   |  |   | 1,680  |   |  |   | (1,690 | ) |  |   |        |   |  |   |       |  |  |   |       |  
|Forfeiture of restricted stock                                                                                              |  |                 |  |           |  |                |  |           |  |          | (33    | )             |  |          | (3   | )            |  |      |       |          |  |       |     |   |  |   | (374   | ) |  |   | 377    |   |  |   |        |   |  |   |       |  |  |   |       |  
|Repurchase and retirement of restricted stock                                                                               |  |                 |  |           |  |                |  |           |  |          | (4     | )             |  |          |     |              |  |      |       |          |  |       |     |   |  |   | (36    | ) |  |   |       |   |  |   |        |   |  |   |       |  |  |   | (36    | )
|Amortization of unearned compensation                                                                                       |  |                 |  |           |  |                |  |           |  |          |       |               |  |          |     |              |  |      |       |          |  |       |     |   |  |   |       |   |  |   | 538    |   |  |   |        |   |  |   |       |  |  |   | 538    |  
|Accumulated other comprehensive loss(1)                                                                                     |  |                 |  |           |  |                |  |           |  |          |       |               |  |          |     |              |  |      |       |          |  |       |     |   |  |   |       |   |  |   |       |   |  |   | (168    | ) |  |   |       |  |  |   | (168   | )
|Tax benefit from stock options exercised and employee stock
    purchase plan                                               |  |                 |  |           |  |                |  |           |  |          |       |               |  |          |     |              |  |      |       |          |  |       |     |   |  |   | 353    |   |  |   |       |   |  |   |        |   |  |   |       |  |  |   | 353    |  
|Redesignation of treasury stock to common stock in accordance
    with Massachusetts Business Corporation Act, Chapter 156D |  |                 |  |           |  |                |  |           |  |          | (1,379 | )             |  |          | (138 | )            |  |      | 1,379  |          |  |       | 138  |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   |       |  |  |   |       |  
|Net income                                                                                                                  |  |                 |  |           |  |                |  |           |  |          |       |               |  |          |     |              |  |      |       |          |  |       |     |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   | 9,373  |  |  |   | 9,373  |  
|                                                                                                                            |  |                 |   |           |  |                |   |           |  |          |        |               |  |          |      |              |  |      |        |          |  |       |      |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        |  |  |   |        |  
|Balance at December 31, 2004                                                                                                |  |                 |  |           |  |                |  |           |  |          | 8,737  |               |  |          | 874  |              |  |      |       |          |  |       |     |   |  |   | 40,849 |   |  |   | (1,572 | ) |  |   | (7,724  | ) |  |   | 28,891 |  |  |   | 61,318 |  
|Issuance of common stock through stock options exercised and
    employee stock purchase plan                               |  |                 |  |           |  |                |  |           |  |          | 304    |               |  |          | 30   |              |  |      |       |          |  |       |     |   |  |   | 3,378  |   |  |   |       |   |  |   |        |   |  |   |       |  |  |   | 3,408  |  
|Issuance of restricted stock                                                                                                |  |                 |  |           |  |                |  |           |  |          | 110    |               |  |          | 11   |              |  |      |       |          |  |       |     |   |  |   | 1,794  |   |  |   | (1,805 | ) |  |   |        |   |  |   |       |  |  |   |       |  
|Forfeiture of restricted stock                                                                                              |  |                 |  |           |  |                |  |           |  |          | (42    | )             |  |          | (4   | )            |  |      |       |          |  |       |     |   |  |   | (667   | ) |  |   | 671    |   |  |   |        |   |  |   |       |  |  |   |       |  
|Retirement of restricted stock                                                                                              |  |                 |  |           |  |                |  |           |  |          | (12    | )             |  |          | (1   | )            |  |      |       |          |  |       |     |   |  |   | (187   | ) |  |   | (9     | ) |  |   |        |   |  |   |       |  |  |   | (197   | )
|Amortization of unearned compensation                                                                                       |  |                 |  |           |  |                |  |           |  |          |       |               |  |          |      |              |  |      |       |          |  |       |     |   |  |   |       |   |  |   | 865    |   |  |   |        |   |  |   |       |  |  |   | 865    |  
|Accumulated other comprehensive loss(1)                                                                                     |  |                 |  |           |  |                |  |           |  |          |       |               |  |          |     |              |  |      |       |          |  |       |     |   |  |   |       |   |  |   |       |   |  |   | (3,044  | ) |  |   |        |  |  |   | (3,044 | )
|Tax benefit from stock options exercised                                                                                    |  |                 |  |           |  |                |  |           |  |          |       |               |  |          |     |              |  |      |       |          |  |       |     |   |  |   | 404    |   |  |   |       |   |  |   |        |   |  |   |       |  |  |   | 404    |  
|Net income                                                                                                                  |  |                 |  |           |  |                |  |           |  |          |       |               |  |          |     |              |  |      |       |          |  |       |     |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   | 11,433 |  |  |   | 11,433 |  
|                                                                                                                            |  |                 |   |           |  |                |   |           |  |          |        |               |  |          |      |              |  |      |        |          |  |       |      |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        |  |  |   |        |  
|Balance at December 31, 2005                                                                                                |  |                 |  |           |  | $              |  |           |  |          | 9,097  |               |  | $        | 910  |              |  |      |       |          |  | $     |     |   |  | $ | 45,571 |   |  | $ | (1,850 | ) |  | $ | (10,768 | ) |  | $ | 40,324 |  |  | $ | 74,187 |  
|                                                                                                                            |  |                 |   |           |  |                |   |           |  |          |        |               |  |          |      |              |  |      |        |          |  |       |      |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        |  |  |   |        |  






|    |                                               
|--- | ----------------------------------------------
|(1) | Comprehensive income is calculated as follows:

|                                                              |                                                                                                                                                                   |                                                              |        |        |        |   |       |        |      |   |       |      |      |  
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------ | ------ | ------ | - | ----- | ------ | ---- | - | ----- | ---- | ---- | -
|                                                              |                                                                                                                                                                   | Year Ended December 31,                                      |       
|                                                              |                                                                                                                                                                   |                                                              |       
|                                                              |                                                                                                                                                                   | 2005                                                         |        |        | 2004   |   |       | 2003   |     
|                                                              |                                                                                                                                                                   |                                                              |        |        |        |   |       |        |     
|Net income                                                    |                                                                                                                                                                   | $                                                            | 11,433 |        |        | $ | 9,373 |        |      | $ | 6,672 |     
|                                                              |                                                                                                                                                                   |                                                              |        |        |        |   |       |        |     
|Adjustments to accumulated other comprehensive income (loss): |                                                                                                                                                                   |                                                              |        |        |        |   |       |        |      |   |       |     
|                                                              | Minimum pension liability adjustment, net of tax expense
    (benefit) of $(976), $193, and $(1,732) in the three years ended
    December 31, 2005, respectively |                                                              |        | (1,509 | )      |   |       | (1,703 | )    |   |       | (675 | )   
|                                                              | Change in unrealized gain (loss) on investment, net of tax
    expense (benefit) of $(207) and $993 in 2005 and 2004,
    respectively                            |                                                              |        | (324   | )      |   |       | 1,535  |      |   |       |     |     
|                                                              | Reclassification adjustment of realized gain included in net
    income, net of tax benefit of $786 in 2005                                                       |                                                              |        | (1,211 | )      |   |       |       |      |   |       |     |     
|                                                              |                                                                                                                                                                   |                                                              |        |        |        |   |       |        |     
|                                                              |                                                                                                                                                                   | Adjustments to accumulated other comprehensive income (loss) |        |        | (3,044 | ) |       |        | (168 | ) |       |      | (675 | )
|                                                              |                                                                                                                                                                   |                                                              |        |        |        |   |       |        |     
|Comprehensive income                                          |                                                                                                                                                                   | $                                                            | 8,389  |        |        | $ | 9,205 |        |      | $ | 5,997 |     
|                                                              |                                                                                                                                                                   |                                                              |        |        |        |   |       |        |     



44



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##### Table of Contents



DYNAMICS RESEARCH CORPORATION





CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |         |         |         |        |        |        |        |  
|------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------ | ---------------------------------------------------- | --------------------------------------------------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | ------ | ------ | ------ | ------ | -
|                                                                          |                                                                                                                 | Year Ended December 31,                                |                                                     
|                                                                          |                                                                                                                 |                                                        |                                                     
|                                                                          |                                                                                                                 | 2005                                                   |                                                      |                                                     | 2004    |        |         | 2003    |        
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        
|Operating activities                                                      |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |         |         |         |       
|                                                                          | Net income                                                                                                      |                                                        | $                                                    | 11,433                                              |         |        | $       | 9,373   |         |         | $       | 6,672  |       
|                                                                          | Loss from discontinued operations                                                                               |                                                        |                                                      |                                                    |         |        |         |        |         |         |         | (1,635 | )     
|                                                                          | Loss on disposal of discontinued operations                                                                     |                                                        |                                                      |                                                    |         |        |         |        |         |         |         | (348   | )     
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        
|                                                                          | Income from continuing operations                                                                               |                                                        |                                                      | 11,433                                              |         |        |         | 9,373   |         |         |         | 8,655  |       
|                                                                          | Adjustments to reconcile net cash provided by operating
    activities                                          |                                                        |                                                      |                                                     |         |        |         |         |         |         |         |        |       
|                                                                          |                                                                                                                 | Depreciation                                           |                                                      |                                                     | 3,719   |        |         |         | 3,624   |         |         |        | 3,007  |       
|                                                                          |                                                                                                                 | (Gain) loss on the sale of investments and equipment   |                                                      |                                                     | (1,984  | )      |         |         | (2      | )       |         |        | 2      |       
|                                                                          |                                                                                                                 | Non-cash interest expense                              |                                                      |                                                     | 304     |        |         |         | 154     |         |         |        | 137    |       
|                                                                          |                                                                                                                 | Income from equity interest                            |                                                      |                                                     | (166    | )      |         |         | (249    | )       |         |        | (198   | )     
|                                                                          |                                                                                                                 | Stock compensation expense                             |                                                      |                                                     | 865     |        |         |         | 538     |         |         |        | 249    |       
|                                                                          |                                                                                                                 | Tax benefit from stock options exercised               |                                                      |                                                     | 404     |        |         |         | 353     |         |         |        | 197    |       
|                                                                          |                                                                                                                 | Amortization of intangible assets                      |                                                      |                                                     | 3,039   |        |         |         | 2,324   |         |         |        | 1,724  |       
|                                                                          |                                                                                                                 | Deferred income taxes provision                        |                                                      |                                                     | 1,869   |        |         |         | 7,697   |         |         |        | 2,733  |       
|                                                                          | Change in operating assets and liabilities, net of effect of
    acquisitions                                   |                                                        |                                                      |                                                     |         |        |         |         |         |         |         |        |       
|                                                                          |                                                                                                                 | Accounts receivable, net                               |                                                      |                                                     | 13,084  |        |         |         | (7,612  | )       |         |        | 1,568  |       
|                                                                          |                                                                                                                 | Unbilled expenditures and fees on contracts in process |                                                      |                                                     | (11,437 | )      |         |         | (17,078 | )       |         |        | (7,643 | )     
|                                                                          |                                                                                                                 | Prepaid expenses and other current assets              |                                                      |                                                     | 4,185   |        |         |         | (3,336  | )       |         |        | (729   | )     
|                                                                          |                                                                                                                 | Accounts payable                                       |                                                      |                                                     | 5,118   |        |         |         | 8,486   |         |         |        | 1,017  |       
|                                                                          |                                                                                                                 | Accrued compensation and employee benefits             |                                                      |                                                     | 847     |        |         |         | 850     |         |         |        | 3,759  |       
|                                                                          |                                                                                                                 | Other accrued liabilities                              |                                                      |                                                     | (6,248  | )      |         |         | (1,161  | )       |         |        | (1,292 | )     
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        
|                                                                          |                                                                                                                 |                                                        | Net cash provided by continuing operations           |                                                     |         | 25,032 |         |         |         | 3,961   |         |        |        | 13,186 |       
|                                                                          |                                                                                                                 |                                                        | Net cash used in discontinued operations             |                                                     |         | (422   | )       |         |         | (754    | )       |        |        | (1,425 | )     
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        
|                                                                          |                                                                                                                 |                                                        |                                                      | Net cash provided by operating activities           |         |        | 24,610  |         |         |         | 3,207   |        |        |        | 11,761 |  
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        
|Investing activities                                                      |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |         |         |         |       
|                                                                          | Purchase of property, plant and equipment                                                                       |                                                        |                                                      | (4,571                                              | )       |        |         | (4,544  | )       |         |         | (8,163 | )     
|                                                                          | Proceeds from the sale of building, net                                                                         |                                                        |                                                      | 19,275                                              |         |        |         |        |         |         |         |       |       
|                                                                          | Proceeds from the sale of investments and equipment                                                             |                                                        |                                                      | 2,003                                               |         |        |         | 17      |         |         |         |       |       
|                                                                          | Purchase of businesses, net of cash acquired                                                                    |                                                        |                                                      | (168                                                | )       |        |         | (53,967 | )       |         |         | (376   | )     
|                                                                          | Dividends from equity investment                                                                                |                                                        |                                                      | 60                                                  |         |        |         | 60      |         |         |         |       |       
|                                                                          | Increase in other assets                                                                                        |                                                        |                                                      | (92                                                 | )       |        |         | (1,473  | )       |         |         | (279   | )     
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        
|                                                                          |                                                                                                                 |                                                        | Net cash provided by (used in) continuing operations |                                                     |         | 16,507 |         |         |         | (59,907 | )       |        |        | (8,818 | )     
|                                                                          |                                                                                                                 |                                                        | Net cash provided by discontinued operations         |                                                     |         |       |         |         |         |        |         |        |        | 2,950  |       
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        
|                                                                          |                                                                                                                 |                                                        |                                                      | Net cash provided by (used in) investing activities |         |        | 16,507  |         |         |         | (59,907 | )      |        |        | (5,868 | )
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        
|Financing activities                                                      |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |         |         |         |       
|                                                                          | Net borrowings (repayments) under revolving credit
    agreement and notes payable                              |                                                        |                                                      | (10,000                                             | )       |        |         | 1,500   |         |         |         | (6,144 | )     
|                                                                          | Issuance of long-term debt                                                                                      |                                                        |                                                      |                                                    |         |        |         | 55,000  |         |         |         |       |       
|                                                                          | Repayments under loan agreement                                                                                 |                                                        |                                                      | (26,680                                             | )       |        |         | (2,908  | )       |         |         |       |       
|                                                                          | Payment of deferred financing costs                                                                             |                                                        |                                                      |                                                    |         |        |         | (798    | )       |         |         |       |       
|                                                                          | Principal payments under mortgage agreement                                                                     |                                                        |                                                      | (7,750                                              | )       |        |         | (500    | )       |         |         | (500   | )     
|                                                                          | Proceeds from the issuance of common stock through stock options
    exercised and employee stock purchase plan |                                                        |                                                      | 3,408                                               |         |        |         | 2,607   |         |         |         | 2,399  |       
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        
|                                                                          |                                                                                                                 |                                                        |                                                      | Net cash provided by (used in) financing activities |         |        | (41,022 | )       |         |         | 54,901  |        |        |        | (4,245 | )
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        
|Net increase (decrease) in cash and cash equivalents                      |                                                                                                                 |                                                        | 95                                                   |                                                     |         |        | (1,799  | )       |         |         | 1,648   |       
|Cash and cash equivalents, beginning of period                            |                                                                                                                 |                                                        | 925                                                  |                                                     |         |        | 2,724   |         |         |         | 1,076   |       
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        
|Cash and cash equivalents, end of period                                  |                                                                                                                 | $                                                      | 1,020                                                |                                                     |         | $      | 925     |         |         | $       | 2,724   |       
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        
|Supplemental disclosure of cash flow information                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |         |         |         |       
|                                                                          | Cash paid during the year for interest                                                                          |                                                        | $                                                    | 4,326                                               |         |        | $       | 1,594   |         |         | $       | 759    |       
|                                                                          | Cash paid during the year for income taxes, net of refunds                                                      |                                                        | $                                                    | (196                                                | )       |        | $       | 124     |         |         | $       | 2,403  |       
|Supplemental disclosure of noncash financing and investing
    activities |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |         |         |         |       
|                                                                          | Restricted stock issued                                                                                         |                                                        | $                                                    | 1,805                                               |         |        | $       | 1,690   |         |         | $       | 230    |       
|Supplemental disclosure  acquisitions                                    |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |         |         |         |       
|                                                                          | Assets acquired                                                                                                 |                                                        | $                                                    |                                                    |         |        | $       | 59,267  |         |         | $       |       |       
|                                                                          | Cash payments, net of cash acquired                                                                             |                                                        |                                                      | (168                                                | )       |        |         | (53,967 | )       |         |         | (376   | )     
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        
|                                                                          | Liabilities assumed                                                                                             |                                                        | $                                                    | (168                                                | )       |        | $       | (5,300  | )       |         | $       | (376   | )     
|                                                                          |                                                                                                                 |                                                        |                                                      |                                                     |         |        |         |         |        



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DYNAMICS RESEARCH CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|        |                       
|------- | ----------------------
|NOTE 1. | NATURE OF THE BUSINESS







|        |                                           
|------- | ------------------------------------------
|NOTE 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation








Accounting for the
Impairment or Disposal of Long-Lived Assets






Risks, Uncertainties and Use of Estimates




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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Revenue Recognition








Accounting for Performance of Construction-Type and Certain
Production-Type Contracts




Out-of






Valuation Allowances




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##### Table of Contents



DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Income Taxes


Accounting for Income Taxes


Cash and Cash Equivalents




Unbilled Expenditures and Fees on Contracts in Process




Concentration of Risk




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##### Table of Contents



DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Inventories


(first-in, Work-in


Property, Plant and Equipment




|                                               |                                   |              |        |        |      |   |        |        | 
|---------------------------------------------- | --------------------------------- | ------------ | ------ | ------ | ---- | - | ------ | ------ | 
|                                               |                                   | December 31, |       
|                                               |                                   |              |       
|                                               |                                   | 2005         |        |        | 2004 |  
|                                               |                                   |              |        |        |      |  
|Land                                           |                                   | $            |       |        |      | $ | 1,126  |       
|Building                                       |                                   |              |       |        |      |   | 11,525 |       
|Machinery and equipment                        |                                   |              | 31,307 |        |      |   | 42,985 |       
|Leasehold improvements                         |                                   |              | 1,011  |        |      |   | 2,520  |       
|                                               |                                   |              |        |        |      |  
|Total property, plant and equipment, at cost   |                                   |              | 32,318 |        |      |   | 58,156 |       
|Less accumulated depreciation and amortization |                                   |              | 20,066 |        |      |   | 36,017 |       
|                                               |                                   |              |        |        |      |  
|                                               | Net property, plant and equipment |              | $      | 12,252 |      |   | $      | 22,139 | 
|                                               |                                   |              |        |        |      |  





Business Combinations




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##### Table of Contents



DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Goodwill


Goodwill and
Other Intangible Assets




Intangible and Other Long-lived Assets


Accounting for the Impairment
or Disposal of Long-lived Assets.


Fair Value of Financial Instruments




Stockholders Equity




Stock-Based Compensation


Accounting for
Stock-Based Compensation Accounting for Stock
Issued to Employees, Accounting for Stock-Based
Compensation-Transition and Disclosure, an Amendment of FASB


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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Statement No. 123


|                                                                                                                                                    |                      |                         |        |      |      |   |        |      |  |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ----------------------- | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                                                    |                      | Year Ended December 31, |       
|                                                                                                                                                    |                      |                         |       
|                                                                                                                                                    |                      | 2005                    |        |      | 2004 |   |        | 2003 | 
|                                                                                                                                                    |                      |                         |        |      |      |   |        |      | 
|Net income as reported                                                                                                                              |                      | $                       | 11,433 |      |      | $ | 9,373  |      |  | $ | 6,672  |     
|Add: Stock-based employee compensation expense included in
    reported net income, net of related tax effects                                      |                      |                         | 515    |      |      |   | 322    |      |  |   | 144    |     
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |                      |                         | (1,204 | )    |      |   | (1,224 | )    |  |   | (1,712 | )   
|                                                                                                                                                    |                      |                         |        |      |      |   |        |      | 
|Pro forma net income                                                                                                                                |                      | $                       | 10,744 |      |      | $ | 8,471  |      |  | $ | 5,104  |     
|                                                                                                                                                    |                      |                         |        |      |      |   |        |      | 
|Earnings per common share:                                                                                                                          |                      |                         |        |      |      |   |        |      |  |   |        |     
|                                                                                                                                                    | Basic, as reported   |                         | $      | 1.30 |      |   | $      | 1.10 |  |   | $      | 0.81 | 
|                                                                                                                                                    | Basic, pro forma     |                         | $      | 1.22 |      |   | $      | 1.00 |  |   | $      | 0.62 | 
|                                                                                                                                                    | Diluted, as reported |                         | $      | 1.24 |      |   | $      | 1.03 |  |   | $      | 0.76 | 
|                                                                                                                                                    | Diluted, pro forma   |                         | $      | 1.16 |      |   | $      | 0.93 |  |   | $      | 0.58 | 

Share-Based Payment




|                        |  |                         |       |   |      |  |       |      |  |  |       |  
|----------------------- |  | ----------------------- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                        |  | Year ended December 31, |      
|                        |  |                         |      
|                        |  | 2005                    |       |   | 2004 |  |       | 2003 | 
|                        |  |                         |       |   |      |  |       |      | 
|Expected volatility     |  |                         | 66.38 | % |      |  | 66.88 | %    |  |  | 64.43 | %
|Dividend yield          |  |                         |      |   |      |  |      |      |  |  |      |  
|Risk-free interest rate |  |                         | 3.87  | % |      |  | 3.81  | %    |  |  | 3.94  | %
|Expected life in years  |  |                         | 6.5   |   |      |  | 7.0   |      |  |  | 8.0   |  

Earnings Per Share






Investment Held for Sale


start-up


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##### Table of Contents



DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Accounting for Certain Investments in
Debt and Equity Securities






Pensions


Employers Accounting for Pensions.


Recent Accounting Pronouncements


Accounting Changes and Error Corrections: a Replacement of
Accounting Principles Board (APB) Opinion No. 20 and
FASB Statement No. 3. Share-Bases Payment,


Accounting for Stock Issued to
Employees


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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|        |                     
|------- | --------------------
|NOTE 3. | BUSINESS ACQUISITION

Impact Innovations Group LLC






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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                            |                                                 |                                                  |                         |        |       |        |  
|--------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------ | ----------------------- | ------ | ----- | ------ | -
|Consideration:                                                              |                                                 |                                                  |                         |       
|                                                                            | Cash                                            |                                                  | $                       | 53,399 |      
|                                                                            | Accrued estimated additional cash consideration |                                                  |                         | 800    |      
|                                                                            | Transaction costs                               |                                                  |                         | 746    |      
|                                                                            | Exit costs                                      |                                                  |                         | 367    |      
|                                                                            |                                                 |                                                  |                        
|                                                                            |                                                 |                                                  | Total consideration     |        |       | 55,312 |  
|                                                                            |                                                 |                                                  |                        
|Allocation of consideration to assets acquired/(liabilities
    assumed):   |                                                 |                                                  |                         |       
|                                                                            |                                                 |                                                  | Working capital         |        |       | 7,013  |  
|                                                                            |                                                 |                                                  | Property and equipment  |        |       | 562    |  
|                                                                            |                                                 |                                                  | Other noncurrent assets |        |       | 57     |  
|                                                                            |                                                 |                                                  | Long-term liabilities   |        |       | (164   | )
|                                                                            |                                                 |                                                  |                        
|                                                                            |                                                 | Total fair value of net tangible assets acquired |                         |        | 7,468 |       
|                                                                            |                                                 |                                                  |                        
|Excess of consideration over fair value of net tangible assets
    acquired |                                                 |                                                  | 47,844                  |       
|                                                                            |                                                 |                                                  |                        
|Allocation of excess consideration to identifiable intangible
    assets:   |                                                 |                                                  |                         |       
|                                                                            |                                                 |                                                  | Customer relationships  |        |       | 11,500 |  
|                                                                            |                                                 |                                                  |                        
|Allocation of excess consideration to goodwill                              |                                                 | $                                                | 36,344                  |       
|                                                                            |                                                 |                                                  |                        



|     |  |                         |     |             |           |   |              |             |  |                 |         |   |        |         |      |   |  |   |     | 
|---- |  | ----------------------- | --- | ----------- | --------- | - | ------------ | ----------- |  | --------------- | ------- | - | ------ | ------- | ---- | - |  | - | --- | 
|     |  | Year Ended December 31, |    
|     |  |                         |    
|     |  |                         |     | Adjustments |           |   | Expenditures |             |  |                
|     |  | Beginning               |     |             |           |   | for changes  |             |  | charged against |         |   | Ending |        
|     |  | Balance                 |     |             | Provision |   |              | in estimate |  |                 | accrual |   |        | Balance |     
|     |  |                         |     |             |           |   |              |             |  |                 |         |   |        |         |     
|2004 |  | $                       |    |             |           | $ | 469          |             |  | $               |        |   |        | $       | (76  | ) |  | $ | 393 | 
|     |  |                         |     |             |           |   |              |             |  |                 |         |   |        |         |     
|2005 |  | $                       | 393 |             |           | $ |             |             |  | $               | (102    | ) |        | $       | (170 | ) |  | $ | 121 | 
|     |  |                         |     |             |           |   |              |             |  |                 |         |   |        |         |     





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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                               |         |              |         |      |      |   |         |      | 
|---------------------------------------------- | ------- | ------------ | ------- | ---- | ---- | - | ------- | ---- | 
|                                               |         | Year Ended   |        
|                                               |         | December 31, |        
|                                               |         |              |        
|                                               |         | 2004         |         |      | 2003 |  
|                                               |         |              |         |      |      |  
|Revenue                                        |         | $            | 309,222 |      |      | $ | 286,810 |     
|Income from continuing operations              |         | $            | 9,692   |      |      | $ | 7,942   |     
|Earnings per share from continuing operations: |         |              |         |      |      |   |         |     
|                                               | Basic   |              | $       | 1.14 |      |   | $       | 0.97 | 
|                                               | Diluted |              | $       | 1.07 |      |   | $       | 0.90 | 



|        |                        
|------- | -----------------------
|NOTE 4. | DISCONTINUED OPERATIONS













|      |  |                                         |     |  |           |   |             |  |                 |   |   |              |  |   |      |   |  |   |   | 
|----- |  | --------------------------------------- | --- |  | --------- | - | ----------- |  | --------------- | - | - | ------------ |  | - | ---- | - |  | - | - | 
|      |  | Activity  Year Ended December 31, 2005
|      |  |                                        
|      |  | Balance                                 |     |  |           |   | Adjustments |  | Expenditures    |   |   | Balance     
|      |  | December 31,                            |     |  |           |   | for changes |  | charged against |   |   | December 31,
|      |  | 2004                                    |     |  | Provision |   | in estimate |  | accrual         |   |   | 2005        
|      |  |                                         |     |  |           |   |             |  |                 |   |   |             
|Lease |  | $                                       | 422 |  |           | $ |            |  |                 | $ |  |              |  | $ | (422 | ) |  | $ |  | 
|      |  |                                         |     |  |           |   |             |  |                 |   |   |              |  |   |     

55



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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|          |  |                                         |       |           |  |             |   |                 |  |              |   |  |  |   |      |   |  |   |     | 
|--------- |  | --------------------------------------- | ----- | --------- |  | ----------- | - | --------------- |  | ------------ | - |  |  | - | ---- | - |  | - | --- | 
|          |  | Activity  Year Ended December 31, 2004
|          |  |                                        
|          |  | Balance                                 |       |           |  | Adjustments |   | Expenditures    |  | Balance     
|          |  | December 31,                            |       |           |  | for changes |   | charged against |  | December 31,
|          |  | 2003                                    |       | Provision |  | in estimate |   | accrual         |  | 2004        
|          |  |                                         |       |           |  |             |   |                 |  |             
|Severance |  | $                                       | 74    |           |  | $           |  |                 |  | $            |  |  |  | $ | (74  | ) |  | $ |    | 
|Lease     |  |                                         | 932   |           |  |             |  |                 |  |              |  |  |  |   | (510 | ) |  |   | 422 | 
|          |  |                                         |       |           |  |             |   |                 |  |              |   |  |  |   |      |   |  |   |     | 
|          |  | $                                       | 1,006 |           |  | $           |  |                 |  | $            |  |  |  | $ | (584 | ) |  | $ | 422 | 
|          |  |                                         |       |           |  |             |   |                 |  |              |   |  |  |   |      |   |  |   |     | 

|          |  |                                         |   |           |  |             |       |                 |  |              |     |  |  |   |        |   |  |   |       | 
|--------- |  | --------------------------------------- | - | --------- |  | ----------- | ----- | --------------- |  | ------------ | --- |  |  | - | ------ | - |  | - | ----- | 
|          |  | Activity  Year Ended December 31, 2003
|          |  |                                        
|          |  | Balance                                 |   |           |  | Adjustments |       | Expenditures    |  | Balance     
|          |  | December 31,                            |   |           |  | for changes |       | charged against |  | December 31,
|          |  | 2002                                    |   | Provision |  | in estimate |       | accrual         |  | 2003        
|          |  |                                         |   |           |  |             |       |                 |  |             
|Severance |  | $                                       |  |           |  | $           | 544   |                 |  | $            |    |  |  | $ | (470   | ) |  | $ | 74    | 
|Lease     |  |                                         |  |           |  |             | 1,325 |                 |  |              | 420 |  |  |   | (813   | ) |  |   | 932   | 
|          |  |                                         |   |           |  |             |       |                 |  |              |     |  |  |   |        |   |  |   |       | 
|          |  | $                                       |  |           |  | $           | 1,869 |                 |  | $            | 420 |  |  | $ | (1,283 | ) |  | $ | 1,006 | 
|          |  |                                         |   |           |  |             |       |                 |  |              |     |  |  |   |        |   |  |   |       | 





|        |                               
|------- | ------------------------------
|NOTE 5. | GOODWILL AND INTANGIBLE ASSETS



|                           |  |                   |        |                   |  |      |       |              |  |   |        |  |  |   |       | 
|-------------------------- |  | ----------------- | ------ | ----------------- |  | ---- | ----- | ------------ |  | - | ------ |  |  | - | ----- | 
|                           |  | December 31, 2005 |        | December 31, 2004
|                           |  |                   |        |                  
|                           |  |                   |        | Accumulated       |  |      |       | Accumulated 
|                           |  | Cost              |        | Amortization      |  | Cost |       | Amortization
|                           |  |                   |        |                   |  |      |       |             
|Customer relationships     |  | $                 | 14,200 |                   |  | $    | 5,720 |              |  | $ | 14,200 |  |  | $ | 2,681 | 
|Non-competition agreements |  |                   | 1,740  |                   |  |      | 1,740 |              |  |   | 1,740  |  |  |   | 1,740 | 
|                           |  |                   |        |                   |  |      |       |              |  |   |        |  |  |   |       | 
|                           |  | $                 | 15,940 |                   |  | $    | 7,460 |              |  | $ | 15,940 |  |  | $ | 4,421 | 
|                           |  |                   |        |                   |  |      |       |              |  |   |        |  |  |   |       | 



|     |  |   |       | 
|---- |  | - | ----- | 
|2006 |  | $ | 2,809 | 
|2007 |  | $ | 2,602 | 
|2008 |  | $ | 2,038 | 
|2009 |  | $ | 1,031 | 



56



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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |             
|------- | ------------
|NOTE 6. | INCOME TAXES



|                                                                                                                                        |  |                         |        |   |      |   |       |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                                                                                                        |  | Year ended December 31, |       
|                                                                                                                                        |  |                         |       
|                                                                                                                                        |  | 2005                    |        |   | 2004 |   |       | 2003 | 
|                                                                                                                                        |  |                         |        |   |      |   |       |      | 
|Income from continuing operations                                                                                                       |  | $                       | 7,781  |   |      | $ | 6,269 |      |  | $ | 6,334  |  
|Discontinued operations                                                                                                                 |  |                         |       |   |      |   |      |      |  |   | (1,284 | )
|Stockholders equity for compensation expense for tax
    purposes in excess of amounts recognized for financial reporting
    purposes |  |                         | (404   | ) |      |   | (353  | )    |  |   | (197   | )
|Other comprehensive income                                                                                                              |  |                         | (1,969 | ) |      |   | 1,186 |      |  |   | (1,732 | )
|                                                                                                                                        |  |                         |        |   |      |   |       |      | 
|                                                                                                                                        |  | $                       | 5,408  |   |      | $ | 7,102 |      |  | $ | 3,121  |  
|                                                                                                                                        |  |                         |        |   |      |   |       |      | 



|                               |         |                         |       |       |      |   |        |        |   |   |       |       | 
|------------------------------ | ------- | ----------------------- | ----- | ----- | ---- | - | ------ | ------ | - | - | ----- | ----- | 
|                               |         | Year ended December 31, |      
|                               |         |                         |      
|                               |         | 2005                    |       |       | 2004 |   |        | 2003   |  
|                               |         |                         |       |       |      |   |        |        |  
|Currently payable (refundable) |         |                         |       |       |      |   |        |        |   |   |       |      
|                               | Federal |                         | $     | 4,902 |      |   | $      | (1,326 | ) |   | $     | 3,054 | 
|                               | State   |                         |       | 1,010 |      |   |        | (101   | ) |   |       | 547   | 
|                               |         |                         |       |       |      |   |        |        |  
|                               |         |                         | 5,912 |       |      |   | (1,427 | )      |   |   | 3,601 |      
|                               |         |                         |       |       |      |   |        |        |  
|Deferred                       |         |                         |       |       |      |   |        |        |   |   |       |      
|                               | Federal |                         |       | 1,493 |      |   |        | 6,144  |   |   |       | 2,138 | 
|                               | State   |                         |       | 376   |      |   |        | 1,552  |   |   |       | 595   | 
|                               |         |                         |       |       |      |   |        |        |  
|                               |         |                         | 1,869 |       |      |   | 7,696  |        |   |   | 2,733 |      
|                               |         |                         |       |       |      |   |        |        |  
|                               |         | $                       | 7,781 |       |      | $ | 6,269  |        |   | $ | 6,334 |      
|                               |         |                         |       |       |      |   |        |        |  



|                                               |                            |                         |       |       |      |   |       |       |  |   |       |       | 
|---------------------------------------------- | -------------------------- | ----------------------- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                               |                            | Year ended December 31, |      
|                                               |                            |                         |      
|                                               |                            | 2005                    |       |       | 2004 |   |       | 2003  | 
|                                               |                            |                         |       |       |      |   |       |       | 
|Provision at statutory rate                    |                            | $                       | 6,533 |       |      | $ | 5,318 |       |  | $ | 5,096 |      
|State income taxes, net of federal tax benefit |                            |                         | 923   |       |      |   | 1,091 |       |  |   | 740   |      
|Decrease in valuation allowance                |                            |                         |      |       |      |   | (442  | )     |  |   |      |      
|Amortization of acquired intangible assets     |                            |                         |      |       |      |   |      |       |  |   | 320   |      
|Other, net                                     |                            |                         | 325   |       |      |   | 302   |       |  |   | 178   |      
|                                               |                            |                         |       |       |      |   |       |       | 
|                                               | Provision for income taxes |                         | $     | 7,781 |      |   | $     | 6,269 |  |   | $     | 6,334 | 
|                                               |                            |                         |       |       |      |   |       |       | 





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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|                                                       |                        |                             |         |         |         |   |         |         |         |  
|------------------------------------------------------ | ---------------------- | --------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                       |                        | December 31,                |        
|                                                       |                        |                             |        
|                                                       |                        | 2005                        |         |         | 2004    |  
|                                                       |                        |                             |         |         |         |  
|Minimum pension liability adjustment                   |                        | $                           | 6,971   |         |         | $ | 5,995   |        
|Deferred gain on sale of building                      |                        |                             | 2,977   |         |         |   |        |        
|Accrued expenses                                       |                        |                             | 1,670   |         |         |   | 1,416   |        
|Accrued vacation                                       |                        |                             | 1,271   |         |         |   | 1,186   |        
|Receivables reserves                                   |                        |                             | 235     |         |         |   | 189     |        
|                                                       |                        |                             |         |         |         |  
|                                                       | Deferred tax assets    |                             |         | 13,124  |         |   |         | 8,786   |        
|                                                       |                        |                             |         |         |         |  
|Unbilled expenditures and fees on contracts in process |                        |                             | (18,704 | )       |         |   | (17,368 | )      
|Pension accrual                                        |                        |                             | (4,591  | )       |         |   | (331    | )      
|Fixed assets and intangibles                           |                        |                             | (3,747  | )       |         |   | (3,807  | )      
|Unrealized gain on securities available for sale       |                        |                             |        |         |         |   | (993    | )      
|Domestic International Sales Corporation               |                        |                             | (1,821  | )       |         |   | (1,798  | )      
|Other                                                  |                        |                             | (170    | )       |         |   | (498    | )      
|                                                       |                        |                             |         |         |         |  
|                                                       | Deferred tax liability |                             |         | (29,033 | )       |   |         | (24,795 | )      
|                                                       |                        |                             |         |         |         |  
|                                                       |                        | Deferred tax liability, net |         | $       | (15,909 | ) |         | $       | (16,009 | )
|                                                       |                        |                             |         |         |         |  









|        |                          
|------- | -------------------------
|NOTE 7. | EMPLOYEE BENEFIT PROGRAMS



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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












Periodic Pension Cost


|                                              |                           |                         |        |       |      |   |        |       |  |   |        |       | 
|--------------------------------------------- | ------------------------- | ----------------------- | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                              |                           | Year ended December 31, |       
|                                              |                           |                         |       
|                                              |                           | 2005                    |        |       | 2004 |   |        | 2003  | 
|                                              |                           |                         |        |       |      |   |        |       | 
|Interest cost on projected benefit obligation |                           | $                       | 3,937  |       |      | $ | 3,940  |       |  | $ | 3,808  |      
|Expected return on plan assets                |                           |                         | (4,407 | )     |      |   | (3,847 | )     |  |   | (3,310 | )    
|Recognized actuarial loss                     |                           |                         | 1,503  |       |      |   | 1,282  |       |  |   | 1,198  |      
|                                              |                           |                         |        |       |      |   |        |       | 
|                                              | Net periodic pension cost |                         | $      | 1,033 |      |   | $      | 1,375 |  |   | $      | 1,696 | 
|                                              |                           |                         |        |       |      |   |        |       | 

Changes in Benefit Obligations


|                                                  |  |              |        |   |      |   |        |  
|------------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                                  |  | November 30, |       
|                                                  |  |              |       
|                                                  |  | 2005         |        |   | 2004 |  
|                                                  |  |              |        |   |      |  
|Projected benefit obligation at beginning of year |  | $            | 68,358 |   |      | $ | 63,417 |  
|Interest cost on projected benefit obligation     |  |              | 3,937  |   |      |   | 3,940  |  
|Benefits paid                                     |  |              | (2,348 | ) |      |   | (2,059 | )
|Actuarial loss                                    |  |              | 814    |   |      |   | 3,060  |  
|                                                  |  |              |        |   |      |  
|Projected benefit obligation at end of year       |  | $            | 70,761 |   |      | $ | 68,358 |  
|                                                  |  |              |        |   |      |  

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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Change in Plan Assets


|                                               |  |              |        |   |      |   |        |  
|---------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                               |  | November 30, |       
|                                               |  |              |       
|                                               |  | 2005         |        |   | 2004 |  
|                                               |  |              |        |   |      |  
|Fair value of plan assets at beginning of year |  | $            | 47,337 |   |      | $ | 42,557 |  
|Actual return on plan assets                   |  |              | 3,187  |   |      |   | 3,912  |  
|Employer contributions                         |  |              | 8,084  |   |      |   | 2,927  |  
|Benefits paid                                  |  |              | (2,348 | ) |      |   | (2,059 | )
|                                               |  |              |        |   |      |  
|Fair value of plan assets at end of year       |  | $            | 56,260 |   |      | $ | 47,337 |  
|                                               |  |              |        |   |      |  

Funded Status


|                                                   |  |              |         |   |      |   |         |  
|-------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                   |  | November 30, |        
|                                                   |  |              |        
|                                                   |  | 2005         |         |   | 2004 |  
|                                                   |  |              |         |   |      |  
|Plan assets less than projected benefit obligation |  | $            | (14,501 | ) |      | $ | (21,022 | )
|Unrecognized net actuarial loss                    |  |              | 21,102  |   |      |   | 20,572  |  
|                                                   |  |              |         |   |      |  
|Net prepaid (accrued) benefit cost                 |  | $            | 6,601   |   |      | $ | (450    | )
|                                                   |  |              |         |   |      |  

Weighted Average Assumptions Used to Determine Benefit
Obligations at Measurement Date


|                              |  |              |      |   |      |  |      |  
|----------------------------- |  | ------------ | ---- | - | ---- |  | ---- | -
|                              |  | November 30, |     
|                              |  |              |     
|                              |  | 2005         |      |   | 2004 | 
|                              |  |              |      |   |      | 
|Discount rate                 |  |              | 5.75 | % |      |  | 6.00 | %
|Rate of compensation increase |  |              | N/A  |   |      |  | N/A  |  

Weighted Average Assumptions Used to Determine Net Periodic
Benefit Cost


|                                  |  |              |      |   |      |  |      |  
|--------------------------------- |  | ------------ | ---- | - | ---- |  | ---- | -
|                                  |  | Year ended   |     
|                                  |  | December 31, |     
|                                  |  |              |     
|                                  |  | 2005         |      |   | 2004 | 
|                                  |  |              |      |   |      | 
|Discount rate                     |  |              | 6.00 | % |      |  | 6.25 | %
|Expected rate of return on assets |  |              | 9.00 | % |      |  | 9.00 | %
|Rate of compensation increase     |  |              | N/A  |   |      |  | N/A  |  



|                  |  |              |     |   |      |  |     |  
|----------------- |  | ------------ | --- | - | ---- |  | --- | -
|                  |  | November 30, |    
|                  |  |              |    
|                  |  | 2005         |     |   | 2004 | 
|                  |  |              |     |   |      | 
|Equity securities |  |              | 64  | % |      |  | 63  | %
|Debt securities   |  |              | 24  | % |      |  | 21  | %
|Other             |  |              | 12  | % |      |  | 16  | %
|                  |  |              |     |   |      | 
|                  |  |              | 100 | % |      |  | 100 | %
|                  |  |              |     |   |      | 

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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Additional Liability


|                                              |  |              |        |  |      |   |        |  
|--------------------------------------------- |  | ------------ | ------ |  | ---- | - | ------ | -
|                                              |  | November 30, |       
|                                              |  |              |       
|                                              |  | 2005         |        |  | 2004 |  
|                                              |  |              |        |  |      |  
|Accumulated benefit obligation at end of year |  | $            | 67,406 |  |      | $ | 63,049 |  
|                                              |  |              |        |  |      |  
|Unfunded accumulated benefit obligation       |  | $            | 11,146 |  |      | $ | 15,712 |  
|Net prepaid (accrued) benefit cost            |  |              | 6,601  |  |      |   | (450   | )
|                                              |  |              |        |  |      |  
|Additional minimum liability                  |  | $            | 17,747 |  |      | $ | 15,262 |  
|                                              |  |              |        |  |      |  

Five Year Benefit Payment Projections


|                                                      |  |   |        | 
|----------------------------------------------------- |  | - | ------ | 
|Year ending December 31, 2006                         |  | $ | 2,796  | 
|Year ending December 31, 2007                         |  | $ | 2,988  | 
|Year ending December 31, 2008                         |  | $ | 3,315  | 
|Year ending December 31, 2009                         |  | $ | 3,480  | 
|Year ending December 31, 2010                         |  | $ | 3,667  | 
|Five subsequent fiscal years ending December 31, 2015 |  | $ | 21,916 | 







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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|        |            
|------- | -----------
|NOTE 8. | STOCK PLANS













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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                                 |           |           |           |          |         |   |      |       | 
|-------------------------------- | --------- | --------- | --------- | -------- | ------- | - | ---- | ----- | 
|                                 |           |           |           | Weighted |        
|                                 |           | Number of |           |          | average |  
|                                 |           | shares    |           |          | price   |  
|                                 |           |           |           |          |         |  
|Outstanding at December 31, 2002 |           |           | 1,714,506 |          |         | $ | 9.56 |      
|                                 | Granted   |           |           | 113,500  |         |   | $    | 12.32 | 
|                                 | Exercised |           |           | (84,734  | )       |   | $    | 7.76  | 
|                                 | Canceled  |           |           | (38,386  | )       |   | $    | 11.58 | 
|                                 |           |           |           |          |         |  
|Outstanding at December 31, 2003 |           |           | 1,704,886 |          |         | $ | 7.47 |      
|                                 | Granted   |           |           | 35,500   |         |   | $    | 15.81 | 
|                                 | Exercised |           |           | (106,132 | )       |   | $    | 7.36  | 
|                                 | Canceled  |           |           | (135,149 | )       |   | $    | 9.43  | 
|                                 |           |           |           |          |         |  
|Outstanding at December 31, 2004 |           |           | 1,499,105 |          |         | $ | 8.75 |      
|                                 | Granted   |           |           | 15,000   |         |   | $    | 18.57 | 
|                                 | Exercised |           |           | (173,491 | )       |   | $    | 9.43  | 
|                                 | Canceled  |           |           | (101,221 | )       |   | $    | 12.00 | 
|                                 |           |           |           |          |         |  
|Outstanding at December 31, 2005 |           |           | 1,239,393 |          |         | $ | 8.51 |      
|                                 |           |           |           |          |         |  
|Exercisable at December 31, 2003 |           |           | 783,672   |          |         | $ | 8.34 |      
|                                 |           |           |           |          |         |  
|Exercisable at December 31, 2004 |           |           | 753,008   |          |         | $ | 7.59 |      
|                                 |           |           |           |          |         |  
|Exercisable at December 31, 2005 |           |           | 646,555   |          |         | $ | 7.81 |      
|                                 |           |           |           |          |         |  

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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Options Outstanding


|                         |  |        |           |              |  |          |      |  |  |   |       | 
|------------------------ |  | ------ | --------- | ------------ |  | -------- | ---- |  |  | - | ----- | 
|                         |  |        |           | Weighted     |  |         
|                         |  |        |           | average      |  | Weighted
|                         |  |        |           | remaining    |  | average 
|                         |  |        |           | contractual  |  | exercise
|Range of exercise prices |  | Shares |           | life (years) |  | price   
|                         |  |        |           |              |  |         
|$ 3.13  $ 7.50          |  |        | 374,460   |              |  |          | 3.55 |  |  | $ | 5.16  | 
|$ 7.51  $13.68          |  |        | 766,673   |              |  |          | 5.24 |  |  | $ | 8.89  | 
|$13.69  $18.60          |  |        | 75,660    |              |  |          | 7.25 |  |  | $ | 17.16 | 
|$18.61  $24.50          |  |        | 22,600    |              |  |          | 6.18 |  |  | $ | 21.94 | 
|                         |  |        |           |              |  |          |      |  |  |   |       | 
|$ 3.13  $24.50          |  |        | 1,239,393 |              |  |          | 5.79 |  |  | $ | 8.51  | 
|                         |  |        |           |              |  |          |      |  |  |   |       | 

Options Exercisable


|                         |  |        |         |          |  |   |       | 
|------------------------ |  | ------ | ------- | -------- |  | - | ----- | 
|                         |  |        |         | Weighted
|                         |  |        |         | average 
|                         |  |        |         | exercise
|Range of exercise prices |  | Shares |         | price   
|                         |  |        |         |         
|$ 3.13  $ 7.50          |  |        | 374,460 |          |  | $ | 5.16  | 
|$ 7.51  $13.68          |  |        | 199,839 |          |  | $ | 8.74  | 
|$13.69  $18.60          |  |        | 49,656  |          |  | $ | 17.72 | 
|$18.61  $24.50          |  |        | 22,600  |          |  | $ | 21.94 | 
|                         |  |        |         |          |  |   |       | 
|$ 3.13  $24.50          |  |        | 646,555 |          |  | $ | 7.81  | 
|                         |  |        |         |          |  |   |       | 



|        |                                                                               
|------- | ------------------------------------------------------------------------------
|NOTE 9. | BUSINESS SEGMENT, GEOGRAPHIC, MAJOR CUSTOMER AND RELATED
    PARTY INFORMATION









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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                     |                                  |                                |         |         |       |   |         |         |       |   |         |         |       | 
|-------------------- | -------------------------------- | ------------------------------ | ------- | ------- | ----- | - | ------- | ------- | ----- | - | ------- | ------- | ----- | 
|                     |                                  | Year ended December 31,        |        
|                     |                                  |                                |        
|                     |                                  | 2005                           |         |         | 2004  |   |         | 2003    |      
|                     |                                  |                                |         |         |       |   |         |         |      
|Revenues             |                                  |                                |         |         |       |   |         |         |       |   |         |        
|                     | Systems and Services             |                                | $       | 293,662 |       |   | $       | 268,634 |       |   | $       | 237,876 |      
|                     | Metrigraphics                    |                                |         | 6,778   |       |   |         | 7,072   |       |   |         | 6,932   |      
|                     |                                  |                                |         |         |       |   |         |         |      
|                     |                                  | $                              | 300,440 |         |       | $ | 275,706 |         |       | $ | 244,808 |        
|                     |                                  |                                |         |         |       |   |         |         |      
|Operating income     |                                  |                                |         |         |       |   |         |         |       |   |         |        
|                     | Systems and Services             |                                | $       | 20,819  |       |   | $       | 16,839  |       |   | $       | 14,979  |      
|                     | Metrigraphics                    |                                |         | 486     |       |   |         | 668     |       |   |         | 410     |      
|                     |                                  |                                |         |         |       |   |         |         |      
|                     |                                  | $                              | 21,305  |         |       | $ | 17,507  |         |       | $ | 15,389  |        
|                     |                                  |                                |         |         |       |   |         |         |      
|Depreciation         |                                  |                                |         |         |       |   |         |         |       |   |         |        
|                     | Systems and Services             |                                | $       | 2,591   |       |   | $       | 2,060   |       |   | $       | 2,126   |      
|                     | Metrigraphics                    |                                |         | 347     |       |   |         | 466     |       |   |         | 546     |      
|                     |                                  |                                |         |         |       |   |         |         |      
|                     |                                  | Depreciation of segment assets |         |         | 2,938 |   |         |         | 2,526 |   |         |         | 2,672 | 
|                     | Depreciation of corporate assets |                                |         | 781     |       |   |         | 1,098   |       |   |         | 335     |      
|                     |                                  |                                |         |         |       |   |         |         |      
|                     |                                  | $                              | 3,719   |         |       | $ | 3,624   |         |       | $ | 3,007   |        
|                     |                                  |                                |         |         |       |   |         |         |      
|Capital expenditures |                                  |                                |         |         |       |   |         |         |       |   |         |        
|                     | Systems and Services             |                                | $       | 758     |       |   | $       | 1,436   |       |   | $       | 1,246   |      
|                     | Metrigraphics                    |                                |         | 63      |       |   |         | 7       |       |   |         | 6       |      
|                     |                                  |                                |         |         |       |   |         |         |      
|                     |                                  | Segment capital expenditures   |         |         | 821   |   |         |         | 1,443 |   |         |         | 1,252 | 
|                     | Corporate capital expenditures   |                                |         | 3,750   |       |   |         | 3,101   |       |   |         | 6,911   |      
|                     |                                  |                                |         |         |       |   |         |         |      
|                     |                                  | $                              | 4,571   |         |       | $ | 4,544   |         |       | $ | 8,163   |        
|                     |                                  |                                |         |         |       |   |         |         |      

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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                 |                      |                      |         |         |         |   |         |         |         | 
|---------------- | -------------------- | -------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                 |                      | December 31,         |        
|                 |                      |                      |        
|                 |                      | 2005                 |         |         | 2004    |  
|                 |                      |                      |         |         |         |  
|Segment assets   |                      |                      |         |         |         |   |         |        
|                 | Systems and Services |                      | $       | 178,090 |         |   | $       | 179,973 |        
|                 | Metrigraphics        |                      |         | 1,442   |         |   |         | 1,859   |        
|                 |                      |                      |         |         |         |  
|                 |                      | Total segment assets |         |         | 179,532 |   |         |         | 181,832 | 
|Corporate assets |                      |                      | 8,221   |         |         |   | 23,302  |        
|                 |                      |                      |         |         |         |  
|                 |                      | $                    | 187,753 |         |         | $ | 205,134 |        
|                 |                      |                      |         |         |         |  







|           |  |                         |        |      |  |         |    |   |  |         |        |   |  |  |    |   |  |   |        |  |  |  |    |  
|---------- |  | ----------------------- | ------ | ---- |  | ------- | -- | - |  | ------- | ------ | - |  |  | -- | - |  | - | ------ |  |  |  | -- | -
|           |  | Year Ended December 31,
|           |  |                        
|           |  | 2005                    |        | 2004 |  | 2003   
|           |  |                         |        |      |  |        
|           |  | Revenue                 |        | %    |  | Revenue |    | % |  | Revenue |        | %
|           |  |                         |        |      |  |         |    |   |  |         |        |  
|Customer A |  | $                       | 48,693 |      |  |         | 16 | % |  | $       | 46,705 |   |  |  | 17 | % |  | $ | 29,377 |  |  |  | 12 | %
|Customer B |  | $                       | 29,551 |      |  |         | 10 | % |  | $       | 30,796 |   |  |  | 11 | % |  | $ | 44,065 |  |  |  | 18 | %



|           |  |              |       |  |      |   |       | 
|---------- |  | ------------ | ----- |  | ---- | - | ----- | 
|           |  | December 31, |      
|           |  |              |      
|           |  | 2005         |       |  | 2004 |  
|           |  |              |       |  |      |  
|Customer A |  | $            | 4,740 |  |      | $ | 4,650 | 
|Customer B |  | $            | 1,770 |  |      | $ | 2,698 | 







|         |                       
|-------- | ----------------------
|NOTE 10. | FINANCING ARRANGEMENTS



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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Any failure by the company and its subsidiaries to make any
    payment of principal, interest and other sums due under the
    facility within three calendar days of the date when such
    payment is due;
|
| |  | Any breach by the company or any of its subsidiaries of certain
    covenants, representations and warranties;                                                                                               
|
| |  | Any default and acceleration of any indebtedness owed by the
    company or any of its subsidiaries to any person (other than the
    bank group) which is in excess of $1,000,000;                          
|
| |  | Any final judgment against the company or any of its
    subsidiaries in excess of $1,000,000 which has not been insured
    to the reasonable satisfaction of the Administrative Agent;                     
|
| |  | Any bankruptcy (voluntary or involuntary) of the company or any
    of its subsidiaries; and                                                                                                                 
|
| |  | Any material adverse change in the business or financial
    condition of the company and its subsidiaries; or                                                                                               
|
| |  | Any change in control of the company.                                                                                                                                                                        



Acquisition term loan






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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Term loan




Revolver




Excess cash flow recapture payments




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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Outstanding borrowings




|                  |                                         |             |       |         |          |   |      |                                        |   |                                               |                                                      | 
|----------------- | --------------------------------------- | ----------- | ----- | ------- | -------- | - | ---- | -------------------------------------- | - | --------------------------------------------- | ---------------------------------------------------- | 
|                  |                                         | Outstanding |       |         | Interest |   |      |                                       
|                  |                                         | principal   |       |         | rate     |   |      | Interest rate option and election date
|                  |                                         |             |       |         |          |   |      |                                       
|December 31, 2005 |                                         |             |       |         |          |   |      |                                        |   |                                              
|                  | Acquisition term loan                   |             | $     | 23,100  |          |   |      | 6.17                                   | % |                                               | 180-day LIBOR Rate option elected on August 1, 2005 
|                  |                                         |             | 2,312 |         |          |   | 7.25 | %                                      |   | Base Rate option elected on December 30, 2005
|                  |                                         |             |       |         |          |   |      |                                       
|                  | Total debt                              |             |       | 25,412  |          |   |      |                                        |   |                                               |                                                     
|                  | Less: Current portion of long-term debt |             |       | (10,170 | )        |   |      |                                        |   |                                               |                                                     
|                  |                                         |             |       |         |          |   |      |                                       
|                  | Long-term debt                          |             | $     | 15,242  |          |   |      |                                        |   |                                               |                                                     
|                  |                                         |             |       |         |          |   |      |                                       
|December 31, 2004 |                                         |             |       |         |          |   |      |                                        |   |                                              
|                  | Acquisition term loan                   |             | $     | 52,092  |          |   |      | 5.41                                   | % |                                               | 90-day LIBOR Rate option elected on November 1, 2004
|                  | Term loan                               |             |       | 7,750   |          |   |      | 5.16                                   | % |                                               | 90-day LIBOR Rate option elected on November 1, 2004
|                  | Revolver                                |             |       | 10,000  |          |   |      | 5.28                                   | % |                                               | 30-day LIBOR Rate option elected on December 1, 2004
|                  |                                         |             |       |         |          |   |      |                                       
|                  | Total debt                              |             |       | 69,842  |          |   |      |                                        |   |                                               |                                                     
|                  | Less: Current portion of long-term debt |             |       | (8,357  | )        |   |      |                                        |   |                                               |                                                     
|                  |                                         | Revolver    |       |         | (10,000  | ) |      |                                        |   |                                               |                                                      | 
|                  |                                         |             |       |         |          |   |      |                                       
|                  | Long-term debt                          |             | $     | 51,485  |          |   |      |                                        |   |                                               |                                                     
|                  |                                         |             |       |         |          |   |      |                                       



|                         |            |   |        |        | 
|------------------------ | ---------- | - | ------ | ------ | 
|Year ending December 31, |            |   |        |       
|                         | 2006       |   | $      | 10,170 | 
|                         | 2007       |   |        | 7,857  | 
|                         | 2008       |   |        | 7,385  | 
|                         | Thereafter |   |        |       | 
|                         |            |   |       
|                         |            | $ | 25.412 |       
|                         |            |   |       



|         |                                
|-------- | -------------------------------
|NOTE 11. | PREFERRED STOCK PURCHASE RIGHTS





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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|         |                              
|-------- | -----------------------------
|NOTE 12. | COMMITMENTS AND CONTINGENCIES





|                 |                               |       |        |                        |          |   |        |             |  |         |            |        |  |            |        |        |  |   |        |        | 
|---------------- | ----------------------------- | ----- | ------ | ---------------------- | -------- | - | ------ | ----------- |  | ------- | ---------- | ------ |  | ---------- | ------ | ------ |  | - | ------ | ------ | 
|                 |                               |       |        | Payments due by period |         
|                 |                               |       |        |                        |         
|                 |                               |       |        | Less than              |          |   | Two to |             |  | Four to |            |        | 
|                 |                               | Total |        |                        | one year |   |        | three years |  |         | five years |        |  | Thereafter |       
|                 |                               |       |        |                        |          |   |        |             |  |         |            |        |  |            |       
|Long-term debt   |                               | $     | 25,412 |                        |          | $ | 10,170 |             |  | $       | 15,242     |        |  | $          |       |        |  | $ |       |       
|Operating leases |                               |       | 42,946 |                        |          |   | 7,011  |             |  |         | 12,717     |        |  |            | 10,737 |        |  |   | 12,481 |       
|Letter of Credit |                               |       | 1,031  |                        |          |   |       |             |  |         | 1,031      |        |  |            |       |        |  |   |       |       
|                 |                               |       |        |                        |          |   |        |             |  |         |            |        |  |            |       
|                 | Total contractual obligations |       | $      | 69,389                 |          |   | $      | 17,181      |  |         | $          | 28,990 |  |            | $      | 10,737 |  |   | $      | 12,481 | 
|                 |                               |       |        |                        |          |   |        |             |  |         |            |        |  |            |       



long-term








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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














71



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DYNAMICS RESEARCH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                                                                       
|-------- | ----------------------------------------------------------------------
|NOTE 13. | QUARTERLY RESULTS (UNAUDITED)(in thousands, except per
    share data)

|     |                                        |         |   |         |  |            |   |                  |  |  |   |        |  |  |   |        | 
|---- | -------------------------------------- | ------- | - | ------- |  | ---------- | - | ---------------- |  |  | - | ------ |  |  | - | ------ | 
|     |                                        | First   |   | Second  |  | Third      |   | Fourth          
|     |                                        | Quarter |   | Quarter |  | Quarter(2) |   | Quarter(3)(4)(5)
|     |                                        |         |   |         |  |            |   |                 
|2005 |                                        |         |   |         |  |            |   |                  |  |  |   |        |  |  |   |       
|     | Revenues                               |         | $ | 73,542  |  |            | $ | 76,188           |  |  | $ | 79,113 |  |  | $ | 71,597 | 
|     | Gross profit                           |         | $ | 11,327  |  |            | $ | 11,944           |  |  | $ | 13,697 |  |  | $ | 12,694 | 
|     | Operating income                       |         | $ | 4,552   |  |            | $ | 4,493            |  |  | $ | 6,215  |  |  | $ | 6,045  | 
|     | Net income                             |         | $ | 2,091   |  |            | $ | 3,273            |  |  | $ | 3,137  |  |  | $ | 2,932  | 
|     | Earnings per common share  diluted(1) |         | $ | 0.23    |  |            | $ | 0.36             |  |  | $ | 0.34   |  |  | $ | 0.31   | 
|    
|2004 |                                        |         |   |         |  |            |   |                  |  |  |   |        |  |  |   |       
|     | Revenues                               |         | $ | 62,068  |  |            | $ | 64,950           |  |  | $ | 70,451 |  |  | $ | 78,237 | 
|     | Gross profit                           |         | $ | 9,090   |  |            | $ | 9,433            |  |  | $ | 11,155 |  |  | $ | 13,305 | 
|     | Operating income                       |         | $ | 3,374   |  |            | $ | 4,117            |  |  | $ | 4,441  |  |  | $ | 5,575  | 
|     | Net income                             |         | $ | 2,044   |  |            | $ | 2,199            |  |  | $ | 2,268  |  |  | $ | 2,862  | 
|     | Earnings per common share  diluted(1) |         | $ | 0.23    |  |            | $ | 0.24             |  |  | $ | 0.25   |  |  | $ | 0.31   | 






|    |                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Earnings per common share is computed independently for each of
    the quarters presented; accordingly, the sum of the quarterly
    earnings per common share may not equal the total computed for
    the year.             
|   
|(2) | 2004 amounts include results of operations of Impact Innovations
    (acquired September 1, 2004) for the period subsequent to
    its acquisition.                                                                            
|   
|(3) | 2004 amounts include results of operations of Impact Innovations
    for the entire fourth quarter.                                                                                                                            
|   
|(4) | 2004 amounts include approximately $0.8 million of revenue
    adjustments related to rate changes on certain contracts with
    the United States Government.                                                                 
|   
|(5) | 2005 benefited from a credit of $0.9 million related to
    employee benefit costs net of estimated rate changes for
    expenses accrued during previous quarters in 2005 that were not
    realized at the level anticipated.

72



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DYNAMICS RESEARCH CORPORATION


SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES


|                                                  |                         |            |  |            |     |             |  |            |     |            |  |   |     |   |  |   |      |   |  |   |     | 
|------------------------------------------------- | ----------------------- | ---------- |  | ---------- | --- | ----------- |  | ---------- | --- | ---------- |  | - | --- | - |  | - | ---- | - |  | - | --- | 
|                                                  |                         |            |  | Additions  |     |             |  |           
|                                                  |                         |            |  |            |     |             |  |           
|                                                  |                         | Balance at |  | Charged to |     | Charged to  |  | Deductions |     | Balance at
|                                                  |                         | Beginning  |  | Costs and  |     | Other       |  | and        |     | End of    
|                                                  |                         | of Period  |  | Expenses   |     | Accounts(A) |  | Write-Offs |     | Period    
|                                                  |                         |            |  |            |     |             |  |            |     |           
|Allowance for doubtful accounts and sales returns |                         |            |  |            |     |             |  |            |     |            |  |   |     |   |  |   |      |   |  |  
|                                                  | Year ended December 31, |            |  |            |     |             |  |            |     |            |  |   |     |   |  |   |      |   |  |   |    
|                                                  |                         | 2005       |  | $          | 644 |             |  | $          | 107 |            |  | $ | 70  |   |  | $ | (233 | ) |  | $ | 588 | 
|                                                  |                         | 2004       |  | $          | 440 |             |  | $          | 72  |            |  | $ | 192 |   |  | $ | (60  | ) |  | $ | 644 | 
|                                                  |                         | 2003       |  | $          | 492 |             |  | $          | 9   |            |  | $ | (30 | ) |  | $ | (31  | ) |  | $ | 440 | 
|Restructuring reserves                            |                         |            |  |            |     |             |  |            |     |            |  |   |     |   |  |   |      |   |  |  
|                                                  | Year ended December 31, |            |  |            |     |             |  |            |     |            |  |   |     |   |  |   |      |   |  |   |    
|                                                  |                         | 2005       |  | $          |    |             |  | $          |    |            |  | $ |    |   |  | $ |     |   |  | $ |    | 
|                                                  |                         | 2004       |  | $          |    |             |  | $          |    |            |  | $ |    |   |  | $ |     |   |  | $ |    | 
|                                                  |                         | 2003       |  | $          | 168 |             |  | $          |    |            |  | $ |    |   |  | $ | (168 | ) |  | $ |    | 






|    |                                                              
|--- | -------------------------------------------------------------
|(A) | Recovery of previously reserved amounts and other adjustments

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
    AND FINANCIAL DISCLOSURE








|         |                        
|-------- | -----------------------
|Item 9A. | CONTROLS AND PROCEDURES

Disclosure Controls and Procedures


13a-15(e) 15d-15(e)) 10-K,


Report of Management on Internal Control over Financial
Reporting


13a-15(f) 15d-15(f). Internal
Control  Integrated Framework










Changes in Internal Control over Financial Reporting








74



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##### Table of Contents



Report of Independent Registered Public Accounting Firm






Internal Control  Integrated Framework








Internal Control  Integrated Framework Internal Control  Integrated Framework













Item 9B. OTHER INFORMATION




75



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PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

10-K.


http://www.drc.com







|         |                       
|-------- | ----------------------
|Item 11. | EXECUTIVE COMPENSATION








|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS








|         |                                       
|-------- | --------------------------------------
|Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES



76



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PART IV







|         |                                       
|-------- | --------------------------------------
|Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULE



10-K.






10-K,


77



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SIGNATURES






| |                                   | 
| | --------------------------------- | 
| | DYNAMICS RESEARCH
    CORPORATION | 
|
| | /s/ James P. Regan                | 
| |                                   | 
| | James P. Regan,                   | 
| | President, Chairman and Chief     | 
| | Executive Officer                 | 





|                                                                 |  |                                                                                                      |  |                |  | 
|---------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                                                
|/s/ James P. ReganJames P. Regan                                 |  | President, Chairman and Chief Executive Officer                                                      |  | March 14, 2006
|                                                                
|/s/ David KeleherDavid Keleher                                   |  | Senior Vice President and Chief Financial Officer (Principal
    Financial Officer)                  |  | March 14, 2006
|                                                                
|/s/ Francis MurphyFrancis Murphy                                 |  | Vice President, Corporate Controller and Chief Accounting
    Officer (Principal Accounting Officer) |  | March 14, 2006
|                                                                
|/s/ John S. Anderegg, Jr.John S. Anderegg, Jr.                   |  | Director                                                                                             |  | March 14, 2006
|                                                                
|/s/ Francis J. AguilarFrancis J. Aguilar                         |  | Director                                                                                             |  | March 14, 2006
|                                                                
|/s/ Gen. George T. Babbitt, Jr.Gen. George T. Babbitt, Jr.       |  | Director                                                                                             |  | March 14, 2006
|                                                                
|/s/ Kenneth F. KamesKenneth F. Kames                             |  | Director                                                                                             |  | March 14, 2006
|                                                                
|/s/ Lt. Gen. Charles P. McCauslandLt. Gen. Charles P. McCausland |  | Director                                                                                             |  | March 14, 2006
|                                                                
|/s/ Nickolas StavropoulosNickolas Stavropoulos                   |  | Director                                                                                             |  | March 14, 2006

78



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##### Table of Contents



EXHIBIT INDEX


|            |       |  |             |                                                                                                                                                                                                                                                                                      |           |                   
|----------- | ----- |  | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------- | ------------------
|Exhibit No. |       |  | Description |                                                                                                                                                                                                                                                                                      | Reference
|            |       |  |             |                                                                                                                                                                                                                                                                                      |          
|            | 2.1   |  |             | Stock Purchase Agreement, dated December 12, 2002, by and
    among Dynamics Research Corporation, Andrulis Corporation and
    the individuals listed on the signature page thereto.                                                                                                |           | A**               
|           
|            | 2.2   |  |             | Equity Purchase Agreement among Dynamics Research Corporation
    and Impact Innovations Group LLC and J3 Technology Services
    Corp., dated August 2, 2004                                                                                                                        |           | T**               
|           
|            | 3.1   |  |             | Restated Articles of Organization of the company, dated
    May 22, 1987.                                                                                                                                                                                                            |           | B**               
|           
|            | 3.2   |  |             | By-Laws of the company, dated May 22, 1987.                                                                                                                                                                                                                                          |           | B**               
|           
|            | 3.3   |  |             | Certificate of Vote of Directors Establishing Series A
    Preferred Stock, dated July 14, 1988.                                                                                                                                                                                     |           | C**               
|           
|            | 3.4   |  |             | Certificate of Vote of Directors Establishing Series B
    Preferred Stock, dated February 17, 1998.                                                                                                                                                                                 |           | D**               
|           
|            | 3.5   |  |             | Amendment, dated September 10, 1998, to the Certificate of
    Vote of Directors Establishing Series B Preferred Stock.                                                                                                                                                              |           | E**               
|           
|            | 3.6   |  |             | Amendment, dated April 28, 1998, to the Articles of
    Organization of the company.                                                                                                                                                                                                 |           | C**               
|           
|            | 3.7   |  |             | Amendment, dated April 25, 2000, to the Articles of
    Organization of the company.                                                                                                                                                                                                 |           | C**               
|           
|            | 4.1   |  |             | Specimen certificate for shares of the companys common
    stock.                                                                                                                                                                                                                   |           | F**               
|           
|            | 4.2   |  |             | Rights Agreement, dated February 17, 1998, between Dynamics
    Research Corporation and the American Stock Transfer &
    Trust Company, as Rights Agent.                                                                                                                           |           | D**               
|           
|            | 10.1  |  |             | Form of indemnification agreement for directors of the company.                                                                                                                                                                                                                      |           | G**               
|           
|            | 10.2  |  |             | Severance Agreement between John S. Anderegg, Jr. and the
    company.                                                                                                                                                                                                               |           | G* **             
|           
|            | 10.3  |  |             | Deferred Compensation Plan for Non-Employee Directors of the
    company.                                                                                                                                                                                                            |           | G* **             
|           
|            | 10.4  |  |             | Form of Consulting Agreement by and between the company and
    Albert Rand.                                                                                                                                                                                                         |           | H* **             
|           
|            | 10.5  |  |             | Form of Supplemental Retirement Pension Agreement by and between
    the company and Albert Rand.                                                                                                                                                                                    |           | H* **             
|           
|            | 10.6  |  |             | Amended 1993 Equity Incentive Plan.                                                                                                                                                                                                                                                  |           | I* **             
|           
|            | 10.7  |  |             | Amended 1995 Stock Option Plan for Non-Employee Directors.                                                                                                                                                                                                                           |           | H* **             
|           
|            | 10.8  |  |             | Mortgage Security Agreement and Assignment, dated
    February 10, 2000, by and among Dynamics Research
    Corporation and Brown Brothers Harriman & Co. and
    Family Bank, FSB.                                                                                                  |           | J**               
|           
|            | 10.9  |  |             | Amendment, dated June 12, 2000, to Mortgage Security
    Agreement and Assignment, by and among Dynamics Research
    Corporation and First Massachusetts Bank, N.A., f/k/a/ Family
    Bank, FSB.                                                                                   |           | K**               
|           
|            | 10.10 |  |             | Employment Agreement between the company and James P. Regan.                                                                                                                                                                                                                         |           | L* **             
|           
|            | 10.11 |  |             | Change of Control Agreement between the company and James P.
    Regan.                                                                                                                                                                                                              |           | L* **             
|           
|            | 10.12 |  |             | 2000 Incentive Plan.                                                                                                                                                                                                                                                                 |           | M* **             
|           
|            | 10.13 |  |             | Form of grant of stock options under the 2000 Incentive Plan.                                                                                                                                                                                                                        |           | U* **             
|           
|            | 10.14 |  |             | Forms of grant of restricted stock under the 2000 Incentive Plan.                                                                                                                                                                                                                    |           | Filed herewith* **
|           
|            | 10.15 |  |             | Non-qualified Stock Option Agreement between the company and
    James P. Regan.                                                                                                                                                                                                     |           | N* **             
|           
|            | 10.16 |  |             | 2000 Employee Stock Purchase Plan.                                                                                                                                                                                                                                                   |           | F* **             
|           
|            | 10.17 |  |             | Special Severance Plan.                                                                                                                                                                                                                                                              |           | O* **             
|           
|            | 10.18 |  |             | Senior Management Deferred Compensation Plan.                                                                                                                                                                                                                                        |           | P* **             
|           
|            | 10.19 |  |             | Amended and Restated Loan Agreement, dated June 28, 2002,
    by and among Dynamics Research Corporation, certain of its
    subsidiaries, and Brown Brothers Harriman & Co., TD
    Banknorth, N.A. and Key Corporation Capital Inc.                                                |           | Q**               
|           
|            | 10.20 |  |             | Amendment, dated December 16, 2002, to the Amended and
    Restated Loan Agreement, dated June 28, 2002, by and among
    Dynamics Research Corporation, certain of its subsidiaries, and
    Brown Brothers Harriman & Co., TD Banknorth, N.A. and
    Key Corporation Capital Inc. |           | A**               



---



##### Table of Contents



|            |       |  |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |           |      
|----------- | ----- |  | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | -----
|Exhibit No. |       |  | Description |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Reference
|            |       |  |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |          
|           
|            | 10.21 |  |             | Second Amendment, dated June 26, 2002, to the Mortgage
    Security Agreement and Assignment, by and between Dynamics
    Research Corporation and TD Banknorth N.A., f/k/a/ First
    Massachusetts Bank, N.A., f/k/a Family Bank, FSB.                                                                                                                                                                                                                                                                                                                       |           | C**  
|           
|            | 10.22 |  |             | Amendment and Waiver, dated March 26, 2003, to the Amended
    and Restated Loan Agreement, dated June 28, 2002, by and
    among Dynamics Research Corporation, certain of its
    subsidiaries, and Brown Brothers Harriman & Co., TD
    Banknorth, N.A. and Key Corporation Capital Inc.                                                                                                                                                                                                                                                                   |           | C**  
|           
|            | 10.23 |  |             | Dynamics Research Corporation Special Severance Plan, as amended
    on May 14, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |           | S* **
|           
|            | 10.24 |  |             | 2003 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |           | S* **
|           
|            | 10.25 |  |             | Form of grant of stock options under the 2003 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |           | U* **
|           
|            | 10.26 |  |             | Form of grant of restricted stock under the 2003 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |           | U* **
|           
|            | 10.27 |  |             | Third Amendment, dated December 23, 2003, to the Amended
    and Restated Loan Agreement, dated June 28, 2002, by and
    among Dynamics Research Corporation, certain of its
    subsidiaries, and Brown Brothers Harriman & Co., TD
    Banknorth, N.A. and Key Corporate Capital Inc.                                                                                                                                                                                                                                                                       |           | S* **
|           
|            | 10.28 |  |             | Second Amended and Restated Loan Agreement by and among Dynamics
    Research Corporation, DRC International Corporation, H.J. Ford
    Associates, Inc., Andrulis Corporation and Impact Innovations
    Group LLC as the Borrowers, and The Lenders Party hereto and
    Brown Brothers Harriman & Co., as Administrative Agent
    and TD Banknorth, N.A. as documentation Agent and Key Bank
    National Association as Co-Syndication Agent and Fleet National
    Bank, a Bank of America company as Co-Syndication Agent, as of
    September 1, 2004. |           | T**  
|           
|            | 10.29 |  |             | Master Unlimited Guaranty dated as of September 1, 2004 by
    each of Dynamics Research Corporation, DRC International
    Corporation, H.J. Ford Associates, Inc., Andrulis Corporation
    and Impact Innovations Group LLC, in favor of Brown Brothers
    Harriman & Co., for itself and as Administrative Agent
    for each of the Lenders which are and which may become parties
    to the Loan Agreement.                                                                                                                                            |           | T**  
|           
|            | 10.30 |  |             | Security Agreement among Brown Brothers Harriman & Co.,
    as Administrative Agent for the Lenders Party to the Loan
    Agreement and Dynamics Research Corporation, DRC International
    Corporation, H.J. Ford Associates, Inc., Andrulis Corporation
    and Impact Innovations Group LLC, dated September 1, 2004.                                                                                                                                                                                                                                      |           | T**  
|           
|            | 10.31 |  |             | Pledge Agreement by and between Dynamics Research Corporation
    and Brown Brothers Harriman & CO., for itself and as
    Administrative Agent for each of the Lenders which are and which
    may become parties to the Loan Agreement, as of
    September 1, 2004.                                                                                                                                                                                                                                                                                         |           | T**  
|           
|            | 10.32 |  |             | Patent and Patent Application Security Agreement by Dynamics
    Research Corporation and Brown Brothers Harriman & Co.,
    as administrative agent for itself and for each of the other
    Lenders as may become parties to the Loan Agreement, dated
    September 1, 2004.                                                                                                                                                                                                                                                                                |           | T**  
|           
|            | 10.33 |  |             | Trademark and Trademark Application Security Agreement by
    Dynamics Research Corporation and Brown Brothers
    Harriman & Co., as administrative agent for itself and
    for each of the other Lenders as may become parties to the Loan
    Agreement, dated September 1, 2004.                                                                                                                                                                                                                                                                          |           | T**  
|           
|            | 10.34 |  |             | Non-qualified Stock Option Agreement between the company and
    William Hoover, dated April 7, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                          |           | R* **
|           
|            | 10.35 |  |             | Deferred Stock Compensation Plan for Non-Employee Directors, as
    amended for deferrals on or after January 1, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                          |           | V* **
|           
|            | 10.36 |  |             | Amendment to Deferred Stock Compensation Plan for Non-Employee
    Directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |           | V* **
|           
|            | 10.37 |  |             | Beneficiary Designation Form for the Deferred Compensation Plan
    for Non-Employee Directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |           | V* **
|           
|            | 10.38 |  |             | Purchase and Sale Agreement, dated November 18, 2005, by
    and between Dynamics Research Corporation and Direct Invest
    Property Acquisition, LLC.                                                                                                                                                                                                                                                                                                                                                                                                        |           | W**  
|           
|            | 10.39 |  |             | Amendment to Purchase and Sale Agreement, dated
    December 28, 2005, by and between Dynamics Research
    Corporation and Direct Invest Property Acquisition, LLC.                                                                                                                                                                                                                                                                                                                                                                                           |           | W**  



---



##### Table of Contents



|            |       |  |             |                                                                                                                                                                                                                                   |           |               
|----------- | ----- |  | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | --------------
|Exhibit No. |       |  | Description |                                                                                                                                                                                                                                   | Reference
|            |       |  |             |                                                                                                                                                                                                                                   |          
|           
|            | 10.40 |  |             | Lease, dated December 28, 2005, by and between Dynamics
    Research Corporation and Direct Invest-60 Frontage, LLC.                                                                                                              |           | W**           
|           
|            | 10.41 |  |             | Consent, Waiver and Amendment Agreement, dated December 28,
    2005, by and among Dynamics Research Corporation, Brown Brothers
    Harriman & Co., KeyBank National Association, TD
    Banknorth, NA, and Bank of America, NA. |           | W**           
|           
|            | 16.1  |  |             | Letter regarding change in certifying accountant.                                                                                                                                                                                 |           | S**           
|           
|            | 21.1  |  |             | Subsidiaries of the registrant.                                                                                                                                                                                                   |           | Filed herewith
|           
|            | 23.1  |  |             | Consent of Independent Registered Public Accounting Firm (Grant
    Thornton LLP)                                                                                                                                                 |           | Filed herewith
|           
|            | 31.1  |  |             | Certification of the Chief Executive Officer pursuant to
    Rule 13a-14(a) under the Securities Exchange Act of 1934,
    as adopted pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                              |           | Filed herewith
|           
|            | 31.2  |  |             | Certification of the Chief Financial Officer pursuant to
    Rule 13a-14(a) under the Securities Exchange Act of 1934,
    as adopted pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                              |           | Filed herewith
|           
|            | 32.1  |  |             | Certification of the Chief Executive Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                    |           | Filed herewith
|           
|            | 32.2  |  |             | Certification of the Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                    |           | Filed herewith






|  |                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|A | Incorporated by reference to the companys Current Report
    on Form 8-K filed
    on January 6, 2003.                                                  
| 
|B | Incorporated by reference to the companys Quarterly Report
    on Form 10-Q for
    the quarterly period ended June 17, 1987.                           
| 
|C | Incorporated by reference to the companys Annual Report on
    Form 10-K for the
    year ended December 31, 2002.                                      
| 
|D | Incorporated by reference to the companys
    Form 8-A filed on
    June 25, 1998.                                                                      
| 
|E | Incorporated by reference to the companys
    Form 8-A/ A filed
    on September 30, 1998.                                                              
| 
|F | Incorporated by reference to the companys Registration
    Statement on
    Form S-8
    (Registration
    No. 333-59706)
    filed on April 27, 2001.  
| 
|G | Incorporated by reference to the companys Annual Report on
    Form 10-K for the
    year ended December 31, 1991.                                      
| 
|H | Incorporated by reference to the companys Quarterly Report
    on Form 10-Q for
    the quarterly period ended March 31, 1997.                          
| 
|I | Incorporated by reference to the companys Annual Report on
    Form 10-K for the
    year ended December 31, 1998.                                      
| 
|J | Incorporated by reference to the companys Current Report
    on Form 8-K filed
    on March 24, 2000.                                                   
| 
|K | Incorporated by reference to the companys Current Report
    on Form 8-K filed
    on June 27, 2000.                                                    
| 
|L | Incorporated by reference to the companys Annual Report on
    Form 10-K for the
    year ended December 31, 1999.                                      
| 
|M | Incorporated by reference to the companys
    Schedule 14A filed on December 6, 1999.                                                                   
| 
|N | Incorporated by reference to the companys Registration
    Statement on
    Form S-8
    (Registration
    No. 333-47838)
    filed on October 12, 2000.
| 
|O | Incorporated by reference to the companys Annual Report on
    Form 10-K for the
    year ended December 31, 2001.                                      
| 
|P | Incorporated by reference to the companys Quarterly Report
    on Form 10-Q for
    the quarterly period ended March 31, 2002.                          
| 
|Q | Incorporated by reference to the companys Quarterly Report
    on Form 10-Q for
    the quarterly period ended June 30, 2002.                           
| 
|R | Incorporated by reference to the companys Quarterly Report
    on Form 10-Q for
    the quarterly period ended March 31, 2003.                          
| 
|S | Incorporated by reference to the companys Annual Report on
    Form 10-K for the
    year ended December 31, 2003.                                      
| 
|T | Incorporated by reference to the companys Current Report
    on Form 8-K, dated
    September 1, 2004, and filed on September 8, 2004.                  
| 
|U | Incorporated by reference to the companys Quarterly Report
    on Form 10-Q for
    the quarterly period ended September 30, 2004.                      
| 
|V | Incorporated by reference to the companys Annual Report on
    Form 10-K for the
    year ended December 31, 2004.                                      



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##### Table of Contents





|   |                                                                                                                                                                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|W  | Incorporated by reference to the companys Current Report
    on Form 8-K, dated
    December 28, 2005, and filed on January 4, 2006.                                                                                                                           
|  
|*  | Management contract or compensatory plan or arrangement.                                                                                                                                                                                                        
|  
|** | In accordance with
    Rule 12b-32 under
    the Securities Exchange Act of 1934, as amended, reference is
    made to the documents previously filed with the Securities and
    Exchange Commission, which documents are hereby incorporated by
    reference.